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Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/credititsprincipOOblanrich 


Credit,  Its  Principles 
and  Practice 


A  Practical  Work  for  Credit  Men^  Present- 
ing the  Principles  and  Practice  Involved 
in  Modern  Credits  andCollections^ 
together    with    an    Rxpla- 
nation  of  Bankruptcy 
Proceedings 


By  ben  H.  BLANTON 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 
1915 


Hf,^|f 


COPYRIGHT    1915 

BY 

THE  RONALD  PRESS  COMPANY 


*.*?*. 


William  G.  Hewitt  Press,  Brooklyn,  Printers 
J.  F.  Tapley  Co.,  New  York,  Binders 


PREFACE 

It  is  not  to  be  supposed  that  any  set  of  rules  can  l^e 
drawn  up  that  will  apply  equally  well  to  all  classes  of  credit. 
At  the  same  time  it  is  evident  that  the  underlying  principles 
of  credit  must  in  all  cases  be  the  same  and  that  the  methods 
developed  in  the  credit  department  of  one  line  of  business 
may  be  easily  adapted  to  the  requirements  of  a  line  entirely 
different.  For  this  reason  the  principles  developed  in  the 
following  pages  and  the  plans  suggested  for  the  handling  of 
credit  problems,  which  are  the  result  of  twenty  years  of 
actual  experience  in  the  credit  office,  will,  the  author  trusts, 
be  found  generally  available. 

There  is  but  little  literature  on  the  subject  of  credits. 
The  situation  is  one  not  unusual  in  connection  with  intense 
business  activities — the  experienced  credit  men  have  found 
no  leisure  to  write  down  the  results  of  their  experience  for 
the  benefit  of  others  and  books  are  few  and  far  between. 
The  present  volume,  therefore,  requires  no  apology,  and 
while  it  is  intended  primarily  for  younger  members  of  the 
profession,  the  author  believes  that  the  experienced  credit 
men  will  find  in  it  much  that  is  helpful. 

The  methods  of  credit-granting  have  undergone  radical 
changes  during  recent  years,  due  to  the  influence  of  com- 
mercial agencies,  trade  bureaus,  the  National  Association  of 
Credit  Men,  and  the  revision  of  business  laws.  The  prin- 
ciples and  methods  discussed  in  the  present  volume  will, 
the  author  trusts,  be  found  in  accordance  with  the  most 
recent  practice.  But  little  attention  has  been  paid  to  systems, 
to  methods  of  preserving  records,  and  other  similar  mat- 
ters of  routine.     Every  credit  man  has  his  own  plans  and 

iii 


^r%A  A  K/=i 


iv  PREFACE 

methods,  and  the  author  has  only  gone  far  enough  to  give 
the  general  principles  which  must  govern  in  all  such  cases. 

Part  IV,  which  deals  with  insolvency,  is  the  only  part 
of  the  book  at  all  technical.  Here  the  author  has  drawn 
largely  upon  his  own  experience.  The  point  of  view  is  for 
the  most  part  that  of  the  layman,  for  it  was  felt  that  the 
average  reader  is  unfamiliar  with  legal  technicalities.  Fre- 
quent reference  has  been  made  to  the  leading  authorities  on 
bankruptcy  law,  such  as  Remington,  Loveland,  and  Collier, 
and  to  these  writers  the  author  wishes  to  express  his  obliga- 
tion. The  careful  study  of  their  works  will  well  repay  the 
active  credit  man. 

In  conclusion,  the  author  wishes  to  express  his  obligation 
to  the  large  number  of  credit  men  who  have  so  kindly 
supplied  him  with  illustrative  forms,  and  to  the  National 
Association  of  Credit  Men  and  particularly  to  J.  H.  Tregoe, 
its  Secretary  and  Treasurer,  for  material  help  and  assistance 
given.  ' 

Ben  H.  Blanton 

March  i,  1915 


CONTENTS 


PART    I— CREDIT    OFFICE    ROUTINE 

CHAPTER  r-  PAGE 

I     The  Credit  Department         .         .         .         13 
Old  Methods  and  New 
The  Work  of  the  Credit  Man 
Relations  with  Other  Departments 
Expense  Allowance  of  Credit  Department 
Determining  a  Policy 
Liberal  Policy  Toward  Customers 
Relations  with  Competitors 

II     The  Credit  Man 22 

Selecting  the  Right  Man 

Special  Qualifications  of  the  Credit  Man 

The  Test  of  Results 

Attitude  of  the  Credit  Man 

Importance  of  Full  Information 

Ethics  of  Bad  Risks 

The  Credit  Man  as  a  Business  Advisor 

Tact  the  Credit  Man's  Asset 

All  Men  Presumptively  Honest 

Caution  a  Requisite 

Watching  the  Accounts 

III  The  Credit  Office  Machinery      .         .         36 

The  Office  Force 

The  Credit  Brief 

Office  Methods  and  Equipment 

Forms  and  Blanks 

Sources  of  Information 

Banks  as  Sources  of  Information 

Salesmen's  Reports 

The  Customer's  References 

IV  Credit-Granting — The  Customer  .         44 

Confidence  and  Credit 
V 


vi  CONTENTS 

CHAPTER  PAGE 

IV     Credit-Granting — The  Customer — Continued 
The  Basis  of  Credit-Granting 
The  Customer's  Ability 
Integrity  Essential  to  Credit-Granting 
Investigation  of  Habits 
Appraising  the  New  Customer 
Capital  and  Expenses 
Assets 
Liabilities 
Insurance 
Local  Conditions 
General  Business  Conditions 

V     Credit-Granting — ^The  House        .         .         54 

Classification  of  Business  as  to  Credit 

1.  The  Local  Jobbing  House 

Credit  Conditions 
Credit  Precautions 
Constructive  Credits 

2.  The  Large  lobbing  House 

Large  Jobber's  Advantages 
Rating  the  Large  Buyer 

3.  The  Manufacturer 

Credit  Conditions 

Effect  of  Mill  Conditions  on  Credit 

The  Responsibilities  of  the  Credit  Man 

Favorable  Conditions  of  Manufacturer's  Credits 

The  Instalment  Trade 

VI     Bank  Credits  .         .         .         .         .         66 

Basis  of  Bank  Credit 
Bank  Credits  and  Mercantile  Credits 
The  Bank  Credit  Man 
^  Functions  of  the  Bank  Credit  Department 

Credit  Information 
A  **Live"  Report — French  Method 
Practical  Uses  of  Bank  Records 
Bankers  Promote  Sound  Business 


CONTENTS  vii 

CHAPTER  PAGE 

VI     Bank  Credits — Continued 

Stock  and  Bond  Investments 

Commercial  Paper 

Relation  of  Banker  and  Broker 

Rating  Commercial  Paper 

Indorsed  Paper  Desirable 

Mutual  Interests  of  the  Bank  and  Its  Customers 


PART   II— CREDIT    INFORMATION    AND 
PROTECTION 

VII     The  Commercial  Agency        .         .         .         8o 
The  Rise  of  the  Commercial  Agency 
Agency  Publications 
The  Agency  Organization 
The  District  Reporter 
Agency  Information 
Agency  Contracts 

VIII     The    National    Association    of    Credit 

Men .        88 

Purpose  of  the  Association 

Origin  and  Ideals 

Practical  Work  of  the  Association 

Working  Committees 

Benefits  of  the  Association 

IX     Interchange  oe  Ledger  Experience      .         95 
The  Interchange  or  Trade  Bureau 
Interchange  of  Ledger  Experience 
The  Credit  Clearing  House 
Clearing  House  Methods — the  District  Ofl&ce 
Compiling  a  Local  Report 
Compiling  a  General  Report 
Advantages  of  the  Clearing  House  Method 
The  Clearing  House  and  Commercial  Agency  Compared 

X     Checking  Orders  for  Credit         .         .       107 

Incoming  Orders 
Investigation  of  Orders 
Commercial  Agency  Reports 


viii  CONTENTS 

CHAPTER  PAGE 

X     Checking  Orders  for  Credit — Continued 
Analysis  of  the  Report 
Credit  Clearing  House  Report 
Conclusions  from  Reports 
Collateral  Data 
Handling  the  Order 

XI     Safety  Appliances  in  the  Credit  Depart- 
ment   ii8 

The  Signed  Statement — Verbal  Statement 

The  "Container" 

Getting  the  Statement 

Investigating  the  Statement 

False  Statement  Laws 

Prosecutions — State  Courts 

Prosecutions — Federal  Courts 

Ethics  vs.  Prudence 

Recoveries 

Replevin 

Reclamations 

XII     Credit  Insurance 127 

The  Function  of  Credit  Insurance 

Origin  and  Methods  of  Insurance 

Insurance  a  Precautionary  Measure  . 

Scope  of  Credit  Insurance 

Work  of  the  Credit  Insurance  Agent 

Limitations  of  the  Insurance  Bond 

A  Wrong  View  of  Credit  Insurance 

Advantages  of  Credit  Insurance 

A  False  Objection  to  Credit  Insurance 

The  Credit  Man  Indispensable 

Credit  Insurance  and  Fire  Insurance 

\y  XIII     Incidental  Problems  of  the  Credit  Man    139 

Credit  Diplomacy 

1.  Failure  to  Pay  Interest 

2.  Excessive  or  Unjust  Discounts 

3.  Unjust  Claims 

4.  Returned  Merchandise 

5.  Cancellations 

Effect  of  Trade  Abuses  on  Credit  Standing 


CONTENTS  ix 

PART     III— THE     COLLECTION     DEPARTMENT 

CHAPTER  -        PAGE 

XIV    The  Collector  and  His  Methods  .        .       147 

Qualifications  of  the  Collector 

Relations  of  the  Credit  and  Collection  Departments 

The  Collector  and  the  Customer 

Delinquent  Debtors 

1.  The  "Collection  Agency"  Method 

2.  The  Draft  Method 

3.  The  Collection  Agency 

4.  Legal  Proceedings 
The  Collection  Attorney 
Collector  and  Attorney 

XV     Collection  and  Credit  Correspondence      156 
Power  of  Expression 
Attitude  Toward  the  Customer 
The  Cost  of  Making  a  Customer 
•  Collection  Correspondence 
Form  Letters 

Requests  for  Credit  Information 
Requests  for  Security 
Importance  of  Notes  as  Evidence 
Refusal  of  an  Order 
Answers  to  Complaints 

XVI     Collection  Agencies      .         .         .        .163 

Collection  Nomenclature 

Dun's  and  the  Clearing  House 

The  Work  of  the  Collection  Agency 

Advance  Fee  Collection  Agencies 

Adjustments 

Collection  Attorneys 

XVII    Adjustments  and  Adjustment  Bureaus     170 

What  Adjustment  Implies 

The  Adjuster 

Elements  of  an  Adjustment 

The  Credit  Man  as  an  Adjuster 

Details  and  Advantages  of  a  "Real"  Adjustment 

The  "Good  Samaritan"  View 

Bankruptcy  Method  of  Settlement 

Credit  Association  Method 


CONTENTS 


PART    IV— INSOLVENCY 


CHAPTER 
v/     XVIII 


Causes  of  Failure  . 

Analysis  of  Failures 
Incompetence 
Lack  of  Capital 

Neglect,  Speculation,  and  Extravagance 
Fraud 
Failures  from  Disaster  and  Competition 

XIX     Bankruptcy  Law  and  Proceedings 

The  National  Bankruptcy  Law 

State  Bankruptcy  Laws 

Bankruptcy  Jurisprudence 

The  Credit  Man  and  the  Bankruptcy  Law 

Involuntary  Bankruptcy 

Procedure  in  Bankruptcy 

The  Petition  in  Bankruptcy 

Filing  the  Petition 

The  Referee  in  Bankruptcy 

XX     Proceedings  of  Creditors 

The  Bankruptcy  Court 

Filing  Creditors'  Claims 

Creditors'  Meetings 

Election  of  Trustee 

Duties  and  Prerogatives  of  the  Trustee 

XXI     Claims 

Proof  of  Claim 

The  Affidavit 

Consideration  for  Claim 

Secured  Claims 

Assigned  Claims 

Who  May  Make  Affidavit  and  Claims 

Affidavit  to  Corporation  Claim 

What  Debts  May  Be  Proved? 

Filing  Claims 

XXII     The  Bankrupt        .... 

Examination  of  the  Bankrupt 
Rights  of  the  Bankrupt 


PAGE 
l8l 


187 


196 


204 


211 


CONTENTS 


XI 


CHAPTER  PAGE 

XXII     The  Bankrupt — Continued 
Duty  of  the  Bankrupt 
Fraudulent  Statements 
Settlement  by  Composition 
Procedure  in  Composition  Settlement 
False  Claims  and  Extortion  of  Property  from  Bankrupt 


XXIII 


Discharge  in  Bankruptcy     . 

Discharge  of  Bankrupts 
Opposition  to  Discharge 
Acts  Barring  Discharge 
Concealment  of  Financial  Condition 
False  Statement  as  a  Bar  to  Discharge 
Fraudulent  Conveyance  of  Property 
Refusal  to  Obey  Court 
The  Act  and  the  Credit  Man 


221 


APPENDIX 


Forms 
1. 

2. 
3-9. 
10. 
11. 
12, 13. 
14. 
15. 
16. 
17. 

18-20. 
21. 
22. 
23. 
24. 
25. 
26. 
27. 


231 


Salesman's  Report 
Salesman's  New  Customer  Report 
Trade  Inquiry  Blanks 
General  Inquiry  Blank 
Inquiry  Blank  for  Bank 
Attorney's  Reports 

Property  Statement — Individual  or  Partnership 
Property  Statement — Corporation 
Property  Statement — Individual  or  Partnership 
"Self-contained"   Property   Statement — Individual,   Partner- 
ship, or  Corporation 
Financial  Statements 
Financial  Statement — Introduction 
Guarantee  Letter 
Guaranty 

Form  for  Classification  of  Information 
Credit  Clearing  House  Report 
Petition  in  Bankruptcy 
Claim  in  Bankruptcy  and  Power  of  Attorney 


The  Bankruptcy  Act 


270 


Credit,  Its  Principles  and  Practice 

Part  I— Credit  Office  Routine 


CHAPTER    I 

THE    CREDIT    DEPARTMENT 

Old  Methods  and  New 

It  is  only  within  late  years  that  the  granting  of  credit 
has  been  placed  upon  what  may  properly  be  called  a  scien- 
tific basis;  and  though  it  may  not  yet  have  assumed  the 
dignity  of  a  full-fledged  science,  it  will  be  admitted  that  the 
work  of  a  well-managed  credit  department  is  now  conducted 
with  a  thoroughness  of  method  and  a  certainty  of  results 
which  characterize  scientific  processes  in  other  lines  of 
activity. 

One  of  the  most  important  factors  entering  into  the 
profitable  management  of  any  business  is  the  rapidity  with 
which  capital  can  be  turned,  and  this  is  mainly  dependent 
upon  the  soundness  of  credits  and  promptness  of  collections. 
In  the  old  days  of  the  hit-or-miss  policy  of  gambling  on 
human  nature,  it  was  impossible  to  forecast  the  results  of 
business  with  any  degree  of  certainty;  but  the  scientific 
methods  and  clean-cut  principles  and  practices  of  the  credit 
office  of  today  have  changed  this,  and  have  made  it  possible 
to  conduct  a  business  with  a  precision  that  forecasts  gains 
or  losses  in  per  cents,  and  thus  gives  confidence  to  managers 
and  investors. 

In  the  good  old  days  of  long  profits,  and  before  the  ad- 

13 


14  CREDIT    OFFICE    ROUTINE 

vent  of  the  highly  specialized  salesman,  credit  was  largely 
dependent  on  the  personal  acquaintance  of  buyer  and  seller. 
If  on  being  introduced  to  the  head  of  the  firm  the  buyer  made 
a  good  impression,  an  account  might  be  opened  on  the  spot. 
It  is  true  that  large  houses  used  the  commercial  agencies 
and  made  investigations  after  a  fashion,  but  not  as  it  is 
done  under  the  stimulus  of  the  razor-edge  competition  of 
today,  when  business  is  conducted  on  a  continually  decreas- 
ing margin  of  profit,  goods  sold  on  definite  terms,  and 
payments  expected  promptly  at  maturity  of  the  bills.  Sales 
are  no  longer  made  on  long  datings,  and  the  rates  of  dis- 
count have  been  reduced;  in  fact,  a  strong  agitation  is  on 
foot  looking  toward  a  net  basis  of  payment  and  the  entire 
elimination  of  discount  for  payment  of  bills  before  they 
fall  due. 

The  Work  of  the  Credit  Man 

The  importance  of  the  credit  man's  work  is  recognized 
in  his  own  immediate  sphere,  and  more  broadly  as  a  factor 
in  the  improvement  of  conditions  which  affect  the  credit 
interests  of  the  country  as  a  whole.  Through  the  organized 
effort  of  credit  men  many  of  the  states  have  enacted  better 
credit  and  collection  laws,  and  national  laws  have  also  con- 
tributed to  the  improvement  of  our  entire  credit  system. 
The  credit  men  of  the  country  are  leading  in  the  fight  for 
better  fire  protection,  whereby  our  excessive  fire  losses, 
which  are  regarded  as  criminal  by  the  insurance  authorities 
of  the  old  world,  may  be  reduced  and  our  resources  thereby 
conserved.  The  insurance  world  has  recognized  the  im- 
portance of  the  credit  man  in  this  field  by  enlisting  his 
services  to  assist  in  both  the  passing  of  laws  and  in  the 
educating  of  the  small  merchant  in  matters  of  insurance. 

Not  only  as  a  member  of  an  organized  body,  but  as  an 
individual,  the  credit  man  of  today  is  found  among  the 


THE    CREDIT    DEPARTMENT 


15 


leaders  in  every  movement  for  the  betterment  of  business 
conditions  and  in  extending  influences  for  good  among  his 
fellow  men  in  all  walks  of  life.  One  has  only  to  glance 
over  a  list  of  the  various  committees  of  the  National  As- 
sociation of  Credit  Men,  to  realize  how  important  a  place 
the  credit  man  fills  in  the  general  scheme  of  business  life 
in  these  early  years  of  the  twentieth  century. 

From  this  it  will  be  seen  that  the  position  of  a  credit 
man  is  invested  with  dignity  and  responsibility,  and  that  the 
credit  department  is,  or  should  be,  one  of  the  strong  bul- 
warks of  any  business.  Not  only  does  it  guard  a  large  part 
of  the  assets  of  the  business  in  the  form  of  outstanding 
accounts,  but  the  credit  man  furnishes  the  sales  manager 
with  information  concerning  business  conditions  in  various 
parts  of  the  country,  thus  enabling  the  latter  to  outline  his 
selling  campaign  with  a  view  to  covering  the  localities  where 
business  may  be  had  with  the  least  effort  and  expense.  The 
credit  man  furnishes  information  of  equal  importance  to  the 
advertising  department  of  the  business;  and  through  his 
study  of  fundamental  business  conditions  he  also  supplies 
the  financier  with  the  statistics  necessary  to  an  intelligent 
study  of  the  money  market  and  the  profitable  placing  of 
loans. 

Relations  with  Other  Departments 

While  the  functions  of  the  credit  department  are  thus  of 
prime  importance,  the  department  must  not  be  assertive,  but 
must  rather  remain  in  the  background,  and  work  in  close 
harmony  with  the  other  departments  in  the  upbuilding  of 
the  business  structure.  Particularly  in  its  relation  with  the 
heads  of  the  business,  should  there  be  a  feeling  of  har- 
monious sympathy.  It  is  easy  to  criticize;  and  the  credit 
department,  from  its  peculiar  position  in  the  business  or- 
ganization, sometimes  receives  more  criticism  from  other 


l5  CREDIT    OFFICE    ROUTINE 

departments  than  is  justifiable.  If  the  credit  man  tries  to 
eliminate  hazardous  risks,  he  is  criticized  by  the  sales  de- 
partment. If  he  makes  an  unwise  credit  and  sustains  a  loss, 
he  is  censured  by  heads  of  the  firm.  While  the  constant  aim 
of  the  credit  man  should  be  to  approve  only  such  accounts 
as  may  be  sold  with  safety,  he  may  occasionally  go  wild  on 
some  risk.  Bad  accounts  will  inevitably  arise ;  they  are  the 
left-overs,  the  remnants  of  the  credit  department,  similar 
to  the  hard  stock  and  unsalable  merchandise  of  the  purchas- 
ing department.  In  any  event,  it  is  only  fair  that  the  credit 
department  should  receive  the  same  sympathetic  encourage- 
ment and  support  as  is  accorded  to  the  other  departments. 

The  credit  man's  position  is,  at  the  best,  a  difficult  one. 
He  has  a  heavy  weight  of  responsibility  on  his  shoulders; 
and  under  a  pressure  of  work  demanding  every  minute  of 
his  time,  it  is  not  unusual  for  him  to  be  "high-strung,"  his 
nerves  being  sufficiently  in  evidence  to  make  him  smart 
under  unjust  criticism.  The  head  of  the  business  may  not 
know  all  the  facts  which  the  credit  man  took  into  considera- 
tion in  forming  his  opinion,  nor  the  conditions  which  set  at 
naught  his  calculations  in  determining  the  advisability  of  the 
credit,  but  the  criticism  comes  just  the  same.  The  "flare-up" 
that  sometimes  follows  is  not  always  unjustified. 

On  the  other  hand,  while  a  change  in  the  management 
of  the  credit  department  is  always  attended  with  more  or 
less  interruption  to  its  work,  and  is  to  be  avoided  if  possible, 
it  should  still  be  borne  in  mind  that  the  demands  of  the  busi- 
ness are  above  personal  considerations,  and  if  the  conduct 
of  the  credit  department  provokes  constant  criticism, 
whether  just  or  unjust,  it  is  best  for  the  business  that  the 
offending  party  be  removed,  and  at  once. 

Expense  Allowance  of  Credit  Department 

A  feature  of  the  credit  department  not  generally  under- 


THE    CREDIT    DEPARTMENT 


17 


stood  by  the  executive  heads,  is  the  expense  connected  with 
procuring  information.  In  a  later  chapter  it  will  be  shown 
that  it  is  vitally  necessary  to  procure  all  the  information 
possible  regarding  the  financial  worth  of  a  customer  in 
order  that  the  decision  of  the  credit  man  may  be  correct. 
This  involves  a  very  considerable  expenditure  in  the  course 
of  a  year;  but  when  it  is  taken  into  consideration  that  one 
loss  which  might  have  been  avoided  through  this  service  will 
often  equal  the  entire  annual  expenditure  for  agency  in- 
formation, the  advisability  of  spending  money  liberally  for 
it  can  hardly  be  questioned.  This  is  not  an  argument  in 
favor  of  giving  a  credit  man  full  power  to  buy  agency 
service  without  any  regard  for  expense,  but  rather,  a  plea 
for  a  liberal  allowance.  It  will  be  found  that  such  an  in- 
vestment will  pay  handsome  dividends. 

The  same  argument  applies  equally  to  the  policy  of 
furnishing  the  credit  department  with  a  thoroughly  efficient 
force  to  carry  on  its  detail  work.  The  liberal  salary  paid 
to  the  credit  man  is  supposed  to  be  a  reward  for  the  use 
of  his  brains,  not  for  the  work  of  his  hands.  He  cannot 
bring  to  bear  upon  his  credit  decisions  a  clear  and  accurate 
judgment  if  his  mind  is  crowded  with  items  of  petty  detail 
which  should  be  relegated  to  minor  clerks. 

Determining  a  Policy 

At  the  moment  of  organization  of  the  credit  department 
it  is  essential  that  a  definite  policy  for  its  conduct  be  de- 
termined. This  policy  is  usually  elaborated  by  means  of 
conferences  among  the  executives,  and  is  the  natural  out- 
come of  certain  fundamental  conditions.  It  is  admitted  that 
the  chief  reason  for  carrying  on  a  business  is  the  making 
of  a  profit  for  those  who  contribute  the  capital.  The  credit 
department  is  not,  therefore,  a  mere  machine  to  pass  on 
credits  and  collect  the  accounts,  but  is,  beyond  this,  the 


1 8  CREDIT    OFFICE    ROUTINE 

agency  for  carrying  out  the  general  policy  of  the  house  as 
to  terms  on  which  the  goods  are  sold;  as  to  discounts  for 
cash  or  payment  of  accounts  before  maturity,  and  in  fixing  a 
safe  margin  for  accounts  receivable ;  or,  more  properly,  for 
that  part  of  the  capital  which  can  be  safely  invested  in  the 
book  accounts  for  merchandise  sold. 

The  manufacturing  or  the  purchasing  department  will 
naturally  determine  the  prices  of  goods  and  the  discounts 
to  be  allowed,  as  such  conditions  are  regulated  by  the  cost, 
the  usages  of  the  trade  in  that  line,  competition,  the  financial 
condition  of  the  customer,  and  the  size  of  the  order.  All 
these  factors  enter  into  the  making  of  the  terms  of  sale; 
and  when  considered  in  connection  with  the  amount  of 
capital  invested,  and  the  firm's  credit,  or  borrowing  capacity, 
they  determine  the  volume  which  the  business  may  reach 
with  safety  and  the  amount  in  dollars  and  cents  which  may 
safely  be  invested  in  accounts  receivable.  No  attempt  will 
be  made  to  discuss  this  phase  of  the  business,  as  it  is  largely 
a  matter  of  theory  and  of  particular  conditions.  The  idea 
here  is  to  emphasize  the  necessity  of  fixing  a  policy  for  the 
credit  department.  We  shall  pass,  therefore,  at  once  to  a 
discussion  of  the  attitude  of  the  house  toward  its  customers, 
or,  more  properly,  the  attitude  of  the  house  through  its 
credit  department  toward  such  customers. 

Liberal  Policy  toward  Customeri 

Whatever  the  kind  of  business,  whether  manufacturing, 
jobbing,  retailing,  or  banking,  or  the  character  of  the  trans- 
action in  which  the  item  of  "accounts  receivable"  originates, 
it  is  a  fact  that  a  liberal  policy  is  necessary  to  growth.  Do 
not  confuse  a  "liberal"  policy  with  a  loose  policy.  A  liberal 
policy  is  not  necessarily  an  easy-going  policy.  A  liberal 
policy  in  the  granting  of  credits  should  always  be  backed  up 
by  what  may  be  termed  a  "close"  policy  in  th(    '  11"  lion  of 


THE    CREDIT    DEPARTMENT 


19 


accounts.  A  broad,  liberal  policy  toward  customers  means 
much  more  than  the  mere  granting  of  credit  and  taking  a 
chance  on  undesirable  risks.  At  no  time  is  the  indiscriminate 
granting  of  credit  to  be  approved.  On  the  contrary,  this 
form  of  gambling  should  be  eliminated  through  the  granting 
of  credit  on  scientific  principles. 

A  new  house  entering  the  field  of  competition  against 
well-established  concerns  is  usually  forced  to  sell  to  mer- 
chants that  are  not  freely  solicited  by  the  older  houses.  This 
is  especially  the  case  with  the  small  jobber  operating  in  a 
restricted  territory ;  and  until  he  gets  on  his  feet,  he  is  forced 
to  content  himself  with  whatever  business  he  can  pick  up. 
A  credit  man  for  such  a  concern  is  obliged  to  pass  credits 
that  contain  an  element  of  risk,  in  order  that  his  house  may 
attain  the  volume  of  business  necessary  to  move  its  mer- 
chandise on  a  profitable  basis.  He  realizes  that  such  credits 
are  undesirable,  and  he  ships  the  bills  with  the  intention  of 
discarding  the  accounts  as  soon  as  his  house  becomes  estab- 
lished. His  investigations  are  usually  very  thorough ;  and, 
while  the  account  is  outstanding,  he  watches  it  closely,  fol- 
lows it  up  to  the  date  of  maturity,  and  then  proceeds  to 
collect  as  vigorously  as  possible.  His  attitude  toward  the 
customers  in  handling  complaints  and  in  adjusting  the 
differences  which  are  constantly  arising,  is  as  liberal  as 
prudence  will  permit  in  order  to  gain  their  confidence  and 
to  assure  them  of  a  square  deal  in  all  their  transactions  with 
his  house.  At  the  same  time  he  must  know  just  where  to 
draw  the  line  to  prevent  a  customer  from  imposing  on  the 
house;  and  this  discrimination  is  one  of  the  finer  points  of 
judgment  which  enter  into  the  making  of  a  good  credit  man. 

Relations  with  Competitors 

In  the  attitude  of  his  department  toward  competitors, 
the  credit  man  should  lose  sight  of  the  selling  end  entirely 


20  CREDIT    OFFICE    ROUTINE 

when  it  comes  to  the  interchange  of  credit  experience.  The 
jealousies  of  the  sales  departments  should  never  interfere 
with  a  harmonious  and  even  friendly  feeling  between  credit 
departments.  It  should  be  the  aim  of  the  credit  department 
to  give  the  credit  man  of  a  competing  house  any  exact  in- 
formation at  its  command  in  regard  to  an  account  of  com- 
mon interest;  and  it  should  serve  this  competitor  with  as 
much  courtesy  as  it  would  grant  to  a  credit  department  in 
a  non-competing  line.  If  a  credit  man  conducts  himself  in 
this  way  he  has  a  right  to  expect  and  demand  the  same 
treatment;  and  right  here  it  might  be  well  to  remark  that 
the  interchange  of  credit  ideas  and  experiences  is  entirely 
a  reciprocal  affair,  and  that  a  credit  man  gets  out  of  the 
competitor  just  as  much  as  he  gives.  Human  nature  is 
strong,  and  in  recent  years  credit  men  have  become  very 
clannish,  as  they  realize  how  dependent  they  are  on  one 
another  and  how  much  good  can  be  accomplished  by  mutual 
kindness  and  genuine  human  fellowship. 

In  order  tO'  judge  intelligently  of  a  credit  it  is  necessary 
to  know  as  far  as  possible  the  names  of  other  houses  selling 
the  customer — not  only  those  in  the  same  line,  but  in  all 
lines  that  the  customer  carries.  Such  investigations 
naturally  throw  the  credit  department  into  contact  with  the 
same  departments  of  other  houses  involved ;  and,  as  they  im- 
part their  experience  with  the  customer  in  question,  the 
courtesy  ought  to  be  returned  with  as  much  care  when  in- 
quiries are  received  from  them.  Even  in  dealing  with 
strangers  a  similar  policy  is  the  part  of  wisdom. 

Some  years  ago,  when  it  was  the  custom  simply  to  in- 
quire regarding  a  risk,  the  answer  would  come  back  "O  K" 
or  "Good  as  Wheat,"  or  some  like  comment;  but  now,  a 
credit  man  wants  definite  information  as  to  the  exact  stand- 
ing of  the  customer.  This  includes  not  only  the  ledger  ex- 
perience, but  some  comments  which  indicate  the  degree  of 


THE    CREDIT    DEPARTMENT  2 1 

confidence  with  which  his  brother  credit  man  regards  the 
risk.  Every  credit  man  today  can  give  numerous  instances 
where  he  has  been  saved  from  loss  by  the  courtesy  of  another 
credit  man — an  absolute  stranger,  who  instead  of  giving 
merely  the  ledger  experience,  stops  his  work  to  dictate  a 
letter  of  comment  or  even  mails  his  entire  credit  file  for 
inspection.  Just  as  there  has  been  a  wonderful  improvement 
in  the  handling  of  credits,  so  also  has  there  been  an  equally 
wonderful  change  in  late  years  in  the  attitude  of  credit  de- 
partments toward  each  other. 


CHAPTER    II 

THE    CREDIT    MAN 

Selecting  the  Right  Man 

The  object  of  this  chapter  is  to  state  the  indispensable 
quaHfications  of  the  credit  man,  quahfications  without  which 
it  would  be  impossible  for  him  to  aspire  to  the  ranks  of 
those  who  are  endeavoring  to  put  credit-granting  on  a 
scientific  basis. 

At  the  outset  it  is  necessary  to  lay  down  a  rule  which 
may  provoke  adverse  criticism,  but  which  from  the  practical 
standpoint  is  sound.  The  credit  man  should  be  an  employee 
— not  a  member  of  the  firm  nor  an  officer  of  the  corpora- 
tion. An  inspection  of  the  personnel  of  our  business  houses, 
and  particularly  of  the  medium  and  smaller  concerns,  will 
show  that  the  credit  man  is  in  most  cases  an  officer,  or  a 
partner,  or  is  otherwise  financially  interested.  Recognizing 
the  importance  of  the  work,  the  direction  of  the  credit  and 
collection  departments  is  assigned  to  that  officer,  or  mem- 
ber of  the  firm,  who  shows  aptitude  for  office  work  and  the 
handling  of  finances. 

There  is  often  a  feeling  that  it  is  not  s^fe  to  intrust  to 
an  outsider — to  a  mere  employee — the  handling  of  a  class 
of  assets  of  the  business  which  often  exceed  all  others  com- 
bined. While  this  feeling  is  entirely  proper,  it  overlooks  the 
important  fact  that  the  handling  of  credits  in  late  years  has 
developed  into  a  scientific  process  which  should  be  entirely 
separate  and  apart  from  the  detail  office  work,  and  which 
should  be  handled  on  a  purely  business  basis.  If  a  member 
of  the  firm  assumes  the  conduct  of  the  credit  department 
and  proves  unable  to  cope  with  its  problems,  the  business 

22 


THE    CREDIT    MAN 


23 


will  suffer  to  the  extent  of  his  inefficiency,  as  it  is  not  pos- 
sible to  discharge  him  and  employ  a  more  efficient  man. 

The  delegation  of  the  work  of  credit-granting  to  an 
employee  leaves  the  proprietor  or  officer  free  to  work  for 
the  upbuilding  of  the  business ;  and  the  credit  man,  relieved 
of  executive  details,  can  perfect  his  own  organization,  study 
individual  credits,  and  by  this  specializing  in  one  department, 
bring  it  to  a  high  state  of  efficiency.  Just  as  highly  de- 
veloped salesmanship  is  the  result  of  specialization,  so  the 
handling  of  credits  and  collections  as  a  department  in  itself 
may,  through  specialization,  be  brought  to  a  much  higher 
development  than  generally  exists. 

By  delegating  the  work  of  the  credit  department  to  an 
employee,  the  executive  may  try  out  different  men  until 
one  is  found  who  comes  up  to  the  required  standard  of 
efficiency.  While  it  is  admitted  that  the  changing  of  credit 
men  is  like  swapping  horses  while  crossing  a  stream,  it  is,  as 
already  intimated,  folly  to  retain  a  man  who  cannot  produce 
satisfactory  results. 

While  the  writer  has  the  greatest  respect  for  the  ambi- 
tion and  general  efficiency  of  the  average  young  business 
man,  it  is  rare  that  safe  and  sane  business  judgment  exists 
in  any  man  much  under  thirty  years  of  age.  A  younger 
man  may  have  "drive"  and  be  invaluable  in  pushing  the 
business  forward,  but — and  the  same  may  be  said  of  a 
member  of  the  firm  passing  on  credits — in  his  eagerness  to 
see  the  business  grow  he  is  liable  to  allow  this  desire  to 
influence  his  judgment  unduly  when  passing  upon  credits. 

A  salaried  credit  man,  on  the  other  hand,  realizes  that 
his  very  living  depends  on  his  ability  to  produce  results  in 
his  department;  and  this  means  not  only  the  upbuilding  of 
the  business,  but  keeping  down  the  percentage  of  losses  to  a 
figure  of  safety.  And  when  it  comes  to  taking  wild  chances, 
the  man  of  settled  judgment,  in  view  of  such  responsibilities, 


24  CREDIT    OFFICE    ROUTINE 

is  going  to  think  twice  before  making  his  decision.  This 
settled  judgment,  or  power  of  wise  decision,  can  come  only 
from  years  of  experience  in  the  credit  office  and  from 
thoughtful  study  of  its  problems.  The  very  young  man 
cannot  have  had  such  experience. 

Special  Qualifications  of  the  Credit  Man 

What,  then,  are  the  qualifications  for  a  good  credit  man  ? 
And  by  qualifications,  let  it  be  understood,  is  meant  rather 
those  qualities  which  are  the  essential  elements  of  the  char- 
acter and  education  of  one  who  desires  to  enter  upon  a  life 
career  in  the  credit  office.  In  the  first  place,  he  must  be  a 
student,  with  an  aptitude  for  credit  problems  and  the  ability 
to  digest  and  put  to  practice  the  lessons  he  learns.  He  must 
be  a  ready  correspondent.  By  this  is  not  meant  the  mere 
ability  to  frame  letters,  perfect  from  a  rhetorical  viewpoint, 
for  such  ability  is,  in  fact,  only  one  of  the  attributes  that 
contribute  to  the  highest  success.  So  important  is  this  mat- 
ter that  a  separate  chapter  has  been  given  to  its  considera- 
tion.* 

A  knowledge  of  the  law  is  absolutely  necessary  to  the 
credit  man;  not  only  a  knowledge  of  the  general  laws  of 
credits  and  collections,  but  of  the  statutes  of  the  states  in 
which  he  operates  and  which  directly  concern  his  work.  He 
should  be  an  expert  accountant,  able  to  analyze  financial 
statements  and  to  tell  at  a  glance  the  true  condition  of  the 
business  of  the  prospective  customer.  He  should  also  be  a 
good  collector.  Even  though  collections  are  handled  by  a 
separate  department,  the  work  of  collecting  is  so  closely  re- 
lated to  the  credit  department  that  it  becomes  one  of  its 
special  features.  Above  all,  the  credit  man  should  be  a 
sound  business  man,  not  only  for  the  good  of  his  own  firm 


Chapter  XV. 


THE    CREDIT    MAN 


25 


but  also  for  the  good  of  those  on  whom  he  is  presumed  to 
sit  in  judgment. 

According  to  many  credit  men,  a  quality  most  important 
to  their  work  is  an  abnormal  development  of  the  sixth 
sense,  better  known  as  "intuition."  This  faculty  is  too 
subtle  and  too  difficult  a  subject  for  discussion  here.  It  is 
sufficient  to  say  that,  be  it  intuition  or  judgment,  or  merely 
the  result  of  trained  experience,  it  is  necessary  that  the 
credit  man  be  able  to  read  human  nature — be  a  judge  of 
character. 

The  Test  of  Results 

The  credit  work  is  the  one  job  in  the  house  that  shows 
the  mettle  of  a  man.  Here  results  count,  and  results  come 
about  with  an  inevitable  regularity.  There  is  no  side-step- 
ping. The  faker,  the  bluffer,  the  "four-flusher,''  quickly 
drops  to  his  level.  It  takes  a  man  of  brains  and  energy  and 
industry  to  be  a  successful  credit  man.  The  brilliant  man 
is  too  often  blinded  and  his  judgment  dimmed  by  his  own 
effulgence.  The  man  with  a  good  ordinary  brain  keyed  up 
and  developed  to  its  highest  efficiency — the  man  who  is  will- 
ing to  live,  eat,  and  sleep  with  the  accounts  for  which  he  is 
responsible — he  is  the  man  who  will  make  good  at  the  credit 
desk. 

Attitude  of  the  Credit  Man 

The  foundation  of  credit  is  reasonable  confidence.  The 
credit  man  should  therefore  guard  against  the  development 
of  a  suspicious  disposition,  for  such  an  attitude  in  credits 
is  as  detrimental  to  business  as  its  antithesis,  which  listens 
readily  and  believes  implicitly  that  there  is  nothing  but 
good  in  every  risk.  But  even  when  not  suspicious,  the 
credit  man  is  likely  to  fall  into  the  habit  of  assuming  a 
negative  attitude  regarding  every  risk  on  which  he  is  called 


26  CREDIT    OFFICE    ROUTINE 

to  pass,  until  he  is  literally  forced  from  his  position  by  the 
accumulation  of  positive  information  on  the  subject  under 
consideration. 

It  is  essential  to  a  liberal  poHcy  that  the  credit  man 
possess  an  open  mind.  He  must  be  a  builder  of  business — 
a  constructive  element  as  opposed  to  the  negative  credit 
man  whose  ideas  and  efforts  will  eventually  prove  damaging 
to  the  accounts  receivable  of  the  firm.  If  the  credit  man 
does  not  have  these  qualities,  he  must  acquire  them.  The 
argument  that  it  is  impossible  to  change  the  nature  of  a 
human  being  is  only  true  in  part.  Character  is  largely  the 
result  of  daily  activity  and  environment;  and  if  a  definite 
and  fixed  policy  of  liberality  is  determined  upon  at  the  outset 
and  rigidly  adhered  to,  it  will  go  far  to  correct  the  warping 
of  mind  and  the  narrowed  vision  that  views  all  risks  with 
suspicion  from  the  moment  they  are  first  brought  to  the 
attention  of  the  man  at  the  credit  desk. 

On  the  premises  so  far  advanced,  the  question  may  be 
asked :  What,  then,  is  a  good  credit  man?  If  the  suspicious 
credit  man  approves  fifty  per  cent  of  the  orders  that  come 
to  his  hands  and  loses  only,  say,  one-half  of  one  per  cent 
of  the  volume  of  sales,  is  he  not  a  good  credit  man? — not 
if  the  liberal  credit  man  can  check  ninety  per  cent  of  his 
orders,  even  if  he  loses  one  per  cent,  figured  on  the  basis  of 
his  net  sales.  The  reason  is  obvious,  for  the  profit  on  the 
additional  shipments  far  exceeds  the  extra  losses,  to  say 
nothing  of  the  advantages  which  have  accrued  to  the  house 
through  the  increased  volume  of  business,  which  enables  it 
to  buy  its  goods  cheaper,  and  also  cuts  down  the  percentage 
of  cost  to  do  business. 

Importance  of  Full  Information 

It  does  not  require  extraordinary  ability  to  check  the 
credits  of  customers  with  million-dollar  ratings;  but  such 


THE    CREDIT    MAN  27 

ratings  are  seldom,  if  ever,  encountered  by  houses  operating 
in  restricted  areas,  and  these  are  the  concerns  that  transact 
the  great  volume  of  business  done  in  this  country.  There- 
fore, we  must  necessarily  consider  most  carefully  the  class 
of  credits  that  such  houses  ordinarily  encounter.  The 
statisticians  claim  that  ninety  per  cent  of  the  business  con- 
cerns of  the  country  fail  or  are  liquidated  at  some  period  of 
their  existence.  With  this  fact  in  mind,  it  can  be  seen  that 
the  position  of  credit  man  calls  for  the  exercise  of  remark- 
able discretion  and  clearness  of  judgment.  While  it  is 
hardly  possible  to  teach  an  individual  this  power  of  dis- 
crimination, it  is  yet  comparatively  easy  to  show  that  many 
losses  may  be  avoided  by  obtaining  all  the  facts  concern- 
ing the  financial  worth  of  the  customer  as  opposed  to 
merely  a  few  of  them.  Based  upon  such  premises,  the 
exercise  of  correct  judgment  will  prove  a  matter  of  little 
difficulty.  In  judging  what  may  be  termed  a  hard  credit, 
the  credit  man  must  develop  to  a  high  degree  an  unfailing 
determination  to  secure  facts,  and  continue  to  dig  into  evi- 
dence and  accumulate  more  and  more  knowledge  on  any 
particular  risk  until  his  exercise  of  judgment  is  not  mere 
guesswork,  but  a  matter  of  figuring  with  some  degree  of 
mathematical  precision.  This  bulldog  tenacity  in  the  pur- 
suit of  facts  is  the  foundation  of  the  success  of  most  credit 
men. 

Ethics  of  Bad  Risks 

It  is  a  fact  that  very  few  losses  are  experienced  on  the 
first  bill  of  goods  shipped  to  a  customer.  It  is  now  possible 
for  the  credit  man  to  procure  information  from  so  many 
sources  that  the  consideration  of  credit  risks,  when  the  ap- 
plicants have  bad  or  unfavorable  records,  is  not  a  matter 
requiring  particular  shrewdness.  A  loss  on  such  a  risk 
seems  almost  inexcusable.     It  is  not  scientific  credit-grant- 


28  CREDIT    OFFICE    ROUTINE 

ing,  but  gambling,  pure  and  simple.  Apart  from  the  loss 
that  his  house  sustains,  a  credit  man  who  takes  such  risks 
is  guilty  of  encouraging  a  class  of  individuals  that  have  no 
place  in  the  business  world.  By  his  assistance  he  permits 
such  concerns  to  compete  with  the  merchant  who  is  trying 
to  conduct  his  business  along  legitimate  lines  and  make  a 
decent  living.  Extension  of  credit  to  a  man  with  a  known 
record  for  dishonesty  is  a  violation  of  the  ethics  of  credit- 
granting.  The  credit  man  owes  some  consideration  to  the 
great  mass  of  honest  merchants,  and  he  has  no  moral  right 
to  encourage  dishonesty  by  giving  his  tacit  approval  to  the 
methods  of  the  dishonest  who  live  at  the  expense  of  the 
better  class. 

It  often  happened  in  former  days  that  a  merchant  would 
fail  and  his  business  go  through  liquidation,  and  almost 
immediately  he  would  set  up  in  business  again  and  get  on 
credit  all  the  goods  he  wanted,  usually  much  more  than  was 
necessary.  This  led  to  the  saying  that  "credit  is  cheap." 
This  cheapness  was  the  result  of  an  inordinate  desire  to 
increase  the  volume  of  sales,  and  the  credit  man  who  had 
not  been  "caught"  by  the  alleged  bankrupt  did  not  hesitate 
to  sell  him  when  he  could  do  so  on  what  he  thought  a  safe 
basis.  The  mental  attitude  of  the  small  merchant  when  he 
sees  such  a  procedure,  placing,  as  it  does,  a  veritable  premium 
on  dishonesty,  is  easily  imagined. 

In  addition  to  the  duty  which  the  credit  man  owes  to 
his  house  in  protecting  it  from  these  dishonest  customers, 
he  should  remember  his  relations  to  other  merchants,  both 
retail  and  wholesale — to  the  former  because  they  come  into 
competition  with  the  dishonest  class,  and  to  the  latter  be- 
cause if  he  extends  credit  to  these  unscrupulous  customers, 
he  practically  forces  other  houses  in  his  line  to  be  guilty  of 
the  same  unscientific  and  unprofitable,  not  to  say  dishonest, 
methods. 


THE    CREDIT    MAN 


29 


The  Credit  Man  as  a  Business  Advisor 

It  is  a  moral  duty  of  the  credit  man  to  use  his  influence 
to  prevent  the  loss  of  capital  by  those  who  he  knows  are 
incapable  of  entering  into  business  on  their  own  account. 
He  should  discourage  the  young  clerk  from  investing  his 
savings  in  business  without  reckoning  that  the  requirements 
are  not  merely  capital,  but,  in  addition,  experience  in  that 
line,  ability  to  meet  competition,  and  other  considerations 
which  a  man  often  fails  to  grasp  when  anxious  to  get  into 
business  on  his  owji  account.  Often  the  broader  viewpoint 
and  the  experience  of  the  credit  man  enable  him  to  help  a 
very  worthy  man  to  success  by  advising  with  him  in  the 
choice  of  a  different  location,  in  the  acquisition  of  a  busi- 
ness already  established,  or  in  the  taking  over  of  a  going 
concern.  At  the  same  time  he  can  further  the  success  of  a 
new  merchant  by  requiring  of  him  a  certain  line  of  action 
in  the  conduct  of  his  business.  He  should  be  ever  ready 
to  check  the  tendency  of  such  a  customer  to  overbuy  or  to 
extend  credit  too  freely.  The  latter  tendency  is  a  frequent 
cause  of  failure,  particularly  of  the  small  merchant,  whose 
ideas  of  whom  to  trust  and  how  much  to  put  out  on  his 
books  in  the  aggregate  are  somewhat  vague.  Above  all,  the 
credit  man  should  insist  upon  the  merchant's  carrying  suffi- 
cient insurance  in  solvent  companies,  and  bend  his  efforts  at 
all  times  to  educate  the  small  merchants  to  a  realization 
of  the  importance  of  so  doing. 

If  the  credit  man  is  dealing  with  small  merchants  he 
should  have  a  knowledge  not  only  of  the  goods  of  his  own 
house,  but  a  general  knowledge  of  all  lines  handled  by  his 
customers.  Each  line  has  its  own  peculiar  terms  of  sale, 
and,  by  watching  closely,  the  credit  man  can  figure  when 
his  customer  will  be  pressed  to  take  care  of  other  bills,  and 
then  so  plan  the  times  and  terms  of  purchases  that  the  cus- 
tomer can  pay  the  credit  man's  house  at  the  due  date.     In 


30 


CREDIT    OFFICE    ROUTINE 


a  restricted  area  of  operations  the  credit  man  comes  so 
close  to  the  customer  that  he  can,  and  in  many  instances  will 
be  forced  to  assist  him  in  planning  a  profitable  running  of 
the  business.  The  importance  of  keeping  in  this  close  touch 
with  the  customer's  conditions  is  so  great  that  the  matter 
is  considered  in  detail  in  Chapter  IV. 

Tact  the  Credit  Man's  Asset 

One  of  the  prime  requisites  for  every  credit  man  is  tact, 
not  only  in  dealing  with  customers,  but  in  his  relations  with 
all  those  whom  he  meets  in  the  course  of  business.  He  needs 
the  support  of  the  executive,  for  without  such  support  his 
work  is  hampered,  and  he  is  robbed  of  all  pleasure  in  the 
work  itself.  Nothing  is  truer  in  the  credit  office  than  the 
saying  of  Elbert  Hubbard's :  "Get  your  pleasure  out  of  your 
work  or  you  will  never  know  what  real  pleasure  is."  If  the 
credit  man  sustains  a  heavy  loss  which  provokes  criticism,  he 
should  be  able  to  lay  his  information  files  open  for  inspec- 
tion and  show  the  reasons  for  his  action  and  the  facts  on 
which  he  granted  the  credit.  All  houses  expect  losses,  and 
the  average  business  man  ought  not  to  grumble  when  he  sees 
that  the  credit  man  has  exercised  all  the  care  and  diligence 
which  could  be  expected.  It  is  the  part  of  the  credit  man, 
therefore,  to  put  himself  in  the  right  light  with  his  em- 
ployers; in  matters  of  loss  he  should  never  hesitate,  when 
called  upon,  to  give  reasons  for  all  his  actions.  He  should 
also  exhibit  a  tactful  openness  to  receive  advice  from  his 
superiors,  and  should  bear  in  mind  that  they  may  know 
something  about  the  business,  even  if  they  do  happen  to  be 
the  proprietors. 

In  dealing  with  the  selling  force  of  the  house,  tact  is  ab- 
solutely essential.  Salesmen  as  a  rule  have  an  exaggerated 
idea  of  their  importance  and  feel  that  on  their  shoulders  rests 
the  responsibility  for  the  success  of  the  house.     The  old  idea 


THE    CREDIT    MAN 


31 


i 


that  a  salesman's  duty  is  to  sell  goods  and  leave  the  matter 
of  credit  to  the  office,  is  a  fallacy  which  is  growing  more  ap- 
parent as  the  times  change  for  the  better.  If  the  credit  man 
and  the  salesman  will  only  take  each  other  into  confidence 
they  can  establish  an  arrangement  for  mutual  information 
and  help  that  will  be  of  the  greatest  value;  the  credit  man 
will  gain  by  acquiring  facts  regarding  his  customers  that 
no  one  but  the  salesman  could  give  him,  while  the  salesman 
can  procure  help  in  the  handling  of  customers,  a  knowledge 
of  what  his  competitors  and  other  houses  are  doing  with 
such  customers,  and  information  of  prospective  business 
which  he  could  not  get  readily  from  any  other  source.  Such 
an  arrangement  between  the  credit  man  and  the  salesman 
results  in  reduced  losses  and  increased  sales. 

If  a  credit  man  is  so  fortunate  as  to  come  into  personal 
contact  with  customers,  tact  is  a  requisite.  The  credit  man 
who  possesses  it  is  then  in  a  position  of  advantage  which  can 
be  appreciated  only  by  one  who  has  gone  through  the  actual 
experience  of  interviewing  a  prospective  customer  or  of  talk- 
ing to  one  who  is  already  a  valued  asset  of  the  house.  If  the 
credit  man  can  place  himself  in  an  attitude  of  friendly  sym- 
pathy with  the  customer,  he  can  draw  out  and  obtain  the  in- 
formation he  needs,  and,  when  it  is  required,  can  give  ad- 
vice so  adroitly  and  so  helpfully  that  the  customer  will  take 
it  and  become  a  friend  of  the  house.  Or,  if  credit  is  refused, 
the  customer  at  least  leaves  without  resentment  and  with  re- 
spect and  kindly  feeling  for  the  consideration  shown  him. 

Like  intuition,  the  ability  to  handle  men  is  a  quality  that 
is  inborn;  but  if  the  credit  man  is  not  naturally  tactful,  he 
can,  by  constant  attention  and  study  of  human  nature, 
acquire  a  facility  in  dealing  with  it  that  is  a  very  good 
imitation  of  tact  itself.  True  tact  is  based  upon  sincerity 
of  purpose  and  genuine  sympathy  for  one's  fellow  men. 
There  must  be  charity  for  human  weakness,  and  allowance 


32  CREDIT    OFFICE    ROUTINE 

must  be  made  for  those  whose  station  in  Hfe  has  denied 
them  some  of  the  advantages  that  others  more  fortunate 
have  enjoyed. 

All  Men  Presumptively  Honest 

Nothing  is  so  fatal  to  the  success  of  the  credit  man  as 
to  adopt  the  attitude  that  all  men  seeking  credit  are  pre- 
sumably dishonest,  until  evidence  to  the  contrary  has  been 
found,  or  until  they  have  proved  their  honesty  to  his  satis- 
faction. There  v^ill  always  be  dishonest  debtors,  but  if 
the  credit  men  of  the  country  continue  their  efforts  they 
will  make  it  harder  each  year  for  the  dishonest  man  to  stay 
in  business,  even  if  they  cannot  eliminate  him  entirely. 
Laws  have  been  enacted  which  deal  with  fraud ;  and  credit 
men  are  constantly  working  to  put  a  stop  to  practices  which, 
if  not  fraudulent  under  the  law,  are,  to  say  the  least,  detri- 
mental to  a  policy  having  honesty  as  its  basis. 

As  already  stated,  the  credit  man  should  always  reject 
a  prospective  customer  with  a  notoriously  bad  record. 
With  the  exception  of  these  notoriously  bad  characters,  it 
may  be  assumed  that  men  in  business  will  pay  their  debts 
if  they  can;  this  simply  as  an  abstract  proposition  and  with- 
out any  reference  to  natural  honesty.  Every  man  must 
make  a  living,  and  nearly  every  man  is  ambitious  to  make 
more  than  a  mere  living.  He  engages  in  the  business  of 
selling  goods  and  puts  into  it  what  money  he  has  saved  and 
often  what  he  can  borrow  from  relatives  or  friends.  It  is 
supposed  that  he  has  chosen  the  line  for  which  he  is  best 
fitted  and  in  which  he  can  make  a  living  with  least  effort. 
His  interest  in  the  success  of  this  business  is  most  vital.  He 
simply  cannot  afford  to  fail.  He  knows  that  he  can  continue 
in  business  only  on  condition  that  he  pay  his  creditors  and 
that  he  do  this  with  a  reasonable  degree  of  promptness. 
Honesty  as  a  policy  is  not  then  so  much  the  best  plan  of 


THE    CREDIT    MAN 


33 


action,  as  an  absolute  necessity.    The  man  of  dishonest  in- 
tention must  become,  at  least,  honest  within  the  law. 

The  man  who  enters  business  with  the  avowed  intention 
of  being  dishonest  is  so  rare  that  he  is  a  negligible  quantity. 
With  all  this  in  mind,  let  the  credit  man  assume  the  affirma- 
tive attitude,  but  with  due  care  and  caution. 

Caution  a  Requisite 

The  idea  of  caution  as  associated  with  the  credit  depart- 
ment has  been  dinned  into  the  ears  of  the  credit  man  until 
there  is  danger  of  his  going  to  the  opposite  extreme.  But 
if  he  will  take  his  list  of  losses  and  analyze  each  one,  he  will 
be  surprised  to  see  how  many  could  have  been  avoided  by 
the  exercise  of  caution,  not  only  in  opening  the  account,  but 
in  its  subsequent  treatment  until,  and  even  after,  it  entered 
the  stage  known  as  a  collection.  More  losses  result  from 
carelessness  on  the  part  of  the  credit  man  than  from  any 
other  source.  In  the  granting  of  the  first  credit  to  a  cus- 
tomer the  credit  man  is  wont  to  exercise  unusual  care  as 
compared  with  his  treatment  of  credits  to  customers  with 
whose  accounts  he  is  familiar.  In  the  first  credit  he  looks 
up  references,  procures  reports,  obtains  statements,  and,  in 
fact,  exercises  every  care.  If,  then,  he  thinks  the  credit  un- 
wise, he  declines  the  order  without  any  of  that  hesitation 
he  would  feel  if  it  were  a  question  of  breaking  off  existing 
relations  with  a  customer  who  has  long  been  on  the  books. 

It  is  especially  the  case,  when  an  account  has  run  a  long 
time  and  good  credit  has  been  established  by  a  succession  of 
prompt  payments,  that  the  usual  alertness  of  the  credit  man 
lapses  and  carelessness  gets  in  its  work.  If  the  credit  man 
is  overwhelmed  with  work  and  pressed  for  time,  or  is  trying 
to  do  work  outside  of  his  department,  which  takes  his  mind 
from  his  credits,  he  will  allow  an  order  to  slip  through  here 
and  there  without  careful  revision.     In  fact,  about  all  the 


34  CREDIT    OFFICE    ROUTINE 

consideration  he  gives  it  is  the  reflection  that  the  customer 
has  been  on  the  books  and  must  be  all  right,  as  he  has  not 
had  any  particular  trouble  in  collecting  previous  bills.  It 
is  just  such  accounts  as  these  that  deceive  the  credit  man 
and  cause  most  of  his  losses. 

Another  frequent  cause  of  loss  is  found  in  the  special  or 
"pet"  accounts  of  the  firm — the  merchant  who  buys  liberally, 
if  not  exclusively,  from  the  house,  who  is  indulged  in  his 
payments  and  allowed  to  lap  bills  or  pay  by  notes  and  gen- 
erally run  his  accounts  to  suit  himself.  Such  a  customer  is 
usually  a  friend  of  the  star  salesman,  or  head  of  the  house, 
and  therefore  is  designated  as  a  "pet"  account.  A  great 
percentage  of  them  go  wrong,  and  the  house  itself  is  largely 
to  blame. 

Watching  the  Accounts 

When  credit  has  been  granted  and  a  new  account  has 
been  opened,  the  real  work  of  the  credit  man  begins.  He 
must  watch  every  account  on  his  books,  and  to  do  this  he 
must  necessarily  have  ready  access  to  the  books  and  records 
of  the  office.  Watching  an  account  means  that  he  is  to 
know  the  size  of  every  order  the  customer  sends  in;  the 
amount  already  owing ;  the  amount,  if  any,  due  or  overdue ; 
the  promptness  in  paying;  the  general  condition  of  the  cus- 
tomer; and  the  fundamental  conditions  in  the  customer's 
immediate  territory.  This  may  seem  like  an  endless  task, 
involving  an  immense  amount  of  detail;  but  if  the  credit 
office  is  properly  systematized,  the  clerk  who  looks  after  the 
detail  work  will  lay  all  these  facts  before  the  credit  man 
whenever  an  order  is  to  be  passed  upon,  and  with  practically 
no  loss  of  time. 

By  keeping  in  touch  with  accounts  in  this  way,  the  credit 
man  can  foresee  trouble  long  before  it  is  realized  by  the 
merchant  himself.     If  through  his  investigations  he  finds 


THE    CREDIT    MAN 


35 


that  a  merchant  is  going  down  hill,  then  and  thereupon  the 
credit  man  should  proceed  to  get  from  under  the  risk  by  col- 
lecting the  account  as  speedily  as  possible.  This  does  not 
mean  that  he  should  be  too  easily  frightened,  but  it  is  sup- 
posed that  when  his  suspicions  are  aroused  he  will  begin  a 
line  of  thorough  investigations,  which  will  either  confirm 
or  allay  these  suspicions,  and  that  if  they  are  confirmed  he 
will  act  with  promptness  and  decision.  Lack  of  decision  in 
the  credit  man  is  fatal.  In  a  busy  season,  with  orders 
coming  over  his  desk  like  an  endless  belt,  he  is  forced  to  act 
promptly,  but  he  must  not  act  carelessly.  He  should  con- 
stantly practice  the  faculty  of  making  quick  decisions  and 
concentrating  upon  the  one  particular  risk  to  be  passed  upon 
until  such  action  becomes  second  nature.  Again  let  it  be 
said  that  delay  and  carelessness  are  akin,  and  are  the  credit 
man's  worst  enemies.  In  the  collection  department  these 
faults  are  worse  than  inexcusable. 


CHAPTER    III 

THE    CREDIT    OFFICE    MACHINERY 

The  Office  Force 

Having  considered  the  credit  man  and  his  quahfications, 
we  pass  to  what  may  be  called  the  machinery  of  the  credit 
office.  It  need  scarcely  be  said  that  the  successful  conduct 
of  the  office  requires  that  it  shall  have  a  head  who  must  be 
manager  in  fact  as  well  as  in  name,  and  whose  personality, 
while  dominating  the  office,  does  not  domineer  over  it.  The 
assistants  should  respect  the  head,  and  his  treatment  of  them 
should  be  such  as  to  merit  respect.  The  decisions  of  the 
manager  must  be  final,  his  judgment  deferred  to,  and  the 
results  accepted  as  predestined.  The  same  carefulness  which 
has  been  exercised  in  the  choice  of  the  credit  man  should  be 
shown  in  the  choice  of  his  assistants  in  order  to  bring  the 
entire  department  up  to  the  same  high  plane. 

In  dealing  with  his  assistants  the  credit  man  should  en- 
courage them  to  independent  thought  and  action.  The  more 
efficient  he  can  make  them  as  a  thinking  element,  the  more 
detail  he  can  shift  to  their  shoulders,  thereby  lessening  his 
own  burdens  and  leaving  his  mind  free  for  more  important 
problems.  It  is  a  great  help  to  the  head  to  discuss  with  his 
assistants  the  customers  and  their  accounts,  and  in  this  way 
awaken  interest  and  pride  in  the  success  of  the  department. 
The  courteous  and  liberal  attitude  of  the  credit  man  toward 
the  customers  should  be  the  attitude  of  the  office  force.  The 
customers  have  a  right  to  demand  this  consideration  from 
the  office  force  when  they  might  not  look  for  so  much  from 
the  head  of  the  department. 

The  credit  man  cannot  possibly  be  in  the  office  every 

36 


THE    CREDIT    OFFICE    MACHINERY  37 

minute,  but  his  work  must  go  on  continuously,  and  if  his 
assistants  are  properly  trained  in  the  policy  of  the  depart- 
ment they  will  be  able  to  assume  the  responsibility  when  he 
is  absent. 

The  Credit  Brief 

In  the  mass  of  material  that  comes  to  the  credit  desk 
there  must  necessarily  be  much  that  is  superfluous  or  merely 
repetition.  All  the  reports  on  any  risk  under  consideration 
should  be  classified  and  arranged  by  a  clerk,  and  the  credit 
man  should  then  make  a  summary,  or  brief  of  the  facts  and 
his  own  deductions.  This  can  be  dictated,  and  transcribed 
on  the  folder  in  which  the  reports  are  held,  or  be  made  up 
as  a  separate  sheet  and  filed  on  top  of  all  the  other  matter. 
Sometimes  a  printed  form  is  used  for  this  brief,  which  when 
filled  in  shows  at  a  glance  the  combined  result  of  all  reports. 
Such  a  form  practically  forces  the  office  to  procure  suffiaent 
information  to  fill  it,  and  thus  automatically  maintains  the 
office  efficiency. 

A  further  advantage  of  the  brief  is  found  in  the  fact  that 
it  requires  an  analysis  of  each  account,  so  that  the  manager 
becomes  thoroughly  familiar  with  it.  The  credit  brief  is 
valuable  also  to  the  collection  department,  as  it  gives  the 
facts  and  the  opinion  of  the  credit  man  on  any  particular  ac- 
count, and  outlines  the  policy  of  the  credit  office  in  the 
future  handling  of  the  account. 

In  the  credit  office  every  important  fact  or  conclusion 
should  be  reduced  to  writing;  for,  while  a  good  memory  is 
an  invaluable  asset,  the  matter  of  credits  is  too  serious  to 
intrust  to  memory  alone.  If  the  office  records  are  kept  full 
and  complete,  the  credit  manager  may  leave  the  office  at  any 
time,  but  the  entire  results  of  his  work  remain,  and  his  as- 
sistants or  his  successor  may  carry  it  on  without  serious 
interruption. 


38 


CREDIT    OFFICE    ROUTINE 


Office  Methods  and  Equipment 

Many  devices  for  the  handling  of  office  details  are  con- 
stantly appearing,  and  the  credit  man  must  keep  informed  on 
such  matters  and  be  ready  to  adopt  any  method  or  device 
which  will  enable  the  office  to  accomplish  its  work  more 
quickly  and  accurately.  Antiquated  office  methods  are  pro- 
ductive of  waste  both  of  time  and  money.  The  large  manu- 
facturers of  filing  cabinets  and  office  furniture  have  trained 
systematizers  who  will  give  personal  advice  and  assistance 
to  their  customers. 

Unless  the  new  credit  man  has  already  had  experience  in 
equipping  an  office,  it  is  well  to  put  the  selection  of  filing  de- 
vices, folders,  and  such  matters  in  the  hands  of  a  reliable  spe- 
cialist. In  most  offices  the  vertical  filing  system  is  em- 
ployed. Important  letters,  reports,  and  credit  data  must  be 
retained  securely  in  the  files,  and  are  therefore  pasted  in  the 
credit  folders  instead  of  being  filed  loosely  like  the  regular 
correspondence. 

The  usual  credit  folder  is  specially  made,  being  some- 
what smaller  than  the  correspondence  folder ;  but  as  it  is  de- 
sirable that  supplies  be  purchased  in  quantities,  it  may  be 
well  for  a  small  office  to  use  the  ordinary  letter  folders,  pro- 
vided the  credit  information  is  securely  fastened.  This  large 
folder  will  be  found  convenient  also — as  there  is  ample 
space — for  making  memoranda  upon  the  folder  itself. 

Forms  and  Blanks 

The  forms  and  blanks  used  in  the  credit  office  should  be 
of  such  a  character  that  all  information  can  be  systematically 
recorded,  and  should  be  so  arranged  that  any  important  fact 
can  be  quickly  ascertained.  The  mistake  should  not  be  made 
of  preparing  a  credit  form  with  too  long  a  list  of  questions 
regarding  the  subject  under  investigation.  The  National 
Association  of  Credit  Men  has  prepared  simple  standard 


THE    CREDIT    OFFICE    MACHINERY 


39 


forms*  which  will  be  found  convenient  and  sufficiently  com- 
prehensive for  all  practical  purposes. 

The  credit  man  should  provide  the  proper  blanks  upon 
which  to  make  investigations  among  the  trade  and  through 
banks  and  attorneys.  A  typewritten  form  letter  would  do, 
but  printed  blanks  are  preferable  for  the  reason  that  they 
can  be  handled  more  quickly  and  the  answers  be  filled  in 
more  readily.  Such  forms  should  omit  useless  questions, 
as  banks  and  attorneys  will  rarely  do  more  than  give  a  brief 
expression  of  opinion  as  to  the  desirability  of  the  risk,  and, 
as  a  matter  of  courtesy,  nothing  more  should  be  asked  or  ex- 
pected. Some  houses,  particularly  medicine  factories,  cheap 
jewelry  concerns,  and  some  crockery  houses,  have  a  habit  of 
employing  credit-inquiry  blanks  containing  dozens  of  ques- 
tions. As  a  consequence,  such  blanks  are  usually  returned 
with  but  the  briefest  comments  scrawled  across  the  face. 

In  the  credit-inquiry  forms  submitted  in  the  Appendix 
of  the  present  volume,  it  will  be  noticed  that  it  is  usually 
left  to  the  recipient  to  use  his  own  judgment  as  to  how  much 
he  will  say  in  regard  to  the  credit  risk.  This  "narrative 
form"  of  inquiry  blank  is  popular  and  often  leads  to  very 
excellent  reports,  as  information  is  frequently  given  which 
would  not  have  been  obtained  in  the  answers  to  a  series  of 
questions. 

With  the  trade-inquiry  blanks  the  object  is  to  obtain  a 
brief  record  of  ledger  experience  and  whatever  other  in- 
formation the  answering  credit  man  may  volunteer. 

The  various  commercial  agencies  have  printed  forms 
upon  which  applications  to  them  for  reports  may  be  made, 
and  which,  when  the  reports  are  furnished,  serve  as  receipts 
and  can  be  checked  against  the  number  of  reports  to  be  fur- 
nished the  applicant  under  the  yearly  contract. 


*  Appendix,  Forms  3,  14-171 


40  CREDIT    OFFICE    ROUTINE 

Sources  of  Information 

As  the  basis  for  granting"  credit  is  information  concern- 
ing a  customer,  the  sources  of  this  information  are  of  the 
utmost  importance. 

The  first  and  most  generally  available  source  of  informa- 
tion is  found  in  the  two  great  commercial  agencies.  These 
agencies  deal  with  every  class  of  business  and  are  preferable 
to  the  smaller  specialized  agencies  which  deal  with  only  one 
particular  line,  and  which  may  more  properly  be  designated 
as  trade  bureaus.  If  the  appropriation  for  the  expenses  of 
the  credit  department  is  sufficient,  by  all  means  take  a  sub- 
scription with  both  Dun's  and  Bradstreet's,  principally  for 
the  purpose  of  checking  the  information  of  one  against  the 
other.  The  work  of  the  commercial  agency  is  considered 
more  fully  in  Chapter  VII. 

As  a  further  source  of  credit  information  and  of  help 
in  collections,  a  subscription  should  be  taken  out  with  one  of 
the  leading  bonding  companies  which  make  a  specialty  of 
guaranteeing  the  faithful  accounting  of  all  claims  sent  to  the 
attorneys  on  their  lists.  Such  companies  furnish  their  sub- 
scribers with  a  book  containing  the  name  of  a  good  collec- 
tion lawyer  in  almost  every  town  in  the  entire  country,  as 
well  as  the  names  of  banks  to  which  drafts  may  be  sent  for 
collection,  or  correspondence  addressed  for  the  purpose  of 
procuring  information.  Accompanying  the  books  are  blanks 
for  making  inquiries  of  the  affiliated  attorneys,  who  will 
make  free  reports  on  the  credit  standing  of  the  customer. 
The  lawyer  in  a  small  town  is  personally  acquainted  with  the 
customer  and  with  his  business,  and  hence  these  reports  often 
contain  inside  facts  known  only  to  the  lawyer  himself. 
Many  losses  are  avoided  by  withholding  credit  on  the  basis 
of  such  reports,  even  when  other  reports  are  favorable.  If 
a  letter  accompanies  the  inquiry  blank  requesting  certain 
specific  facts  to  supplement  the  information  already  at  hand, 


THE    CREDIT    OFFICE    MACHINERY 


41 


the  report  assumes  additional  value  in  that  it  is  personal  and 
to  the  point. 

Banks  as  Sources  of  Information 

The  value  of  information  furnished  by  a  bank  depends 
largely  on  the  form  of  the  request.*  If  the  credit  man  is 
operating  over  a  small  radius,  he  may  become  acquainted 
with  the  lawyers  and  bankers  in  his  territory — an  acquaint- 
ance which  cannot  be  appraised  too  highly.  If,  however,  a 
request  is  addressed  to  a  bank  at  a  distance,  it  might  be  well 
to  mention  the  fact  that  information  has  been  obtained  from 
the  usual  sources  in  the  way  of  commercial  reports.  Just 
as  when  applying  to  a  lawyer,  the  request  should  be  of  a  spe- 
cific nature,  and  along  lines  strictly  within  the  scope  of  the 
bank  and  consonant  with  the  relations  existing  between  the 
bank  and  the  customer. 

It  should  be  remembered  that  the  cashier  of  a  bank  has 
his  own  business  to  attend  to.  He  is  not  a  bureau  of  gen- 
eral information,  and  is  under  no  obHgations  to  report  to  a 
stranger  on  the  financial  condition  of  his  customer.  The 
credit  man  should  ask  only  for  such  information  as  he  can- 
not obtain  from  other  sources,  and  should  not  ask  the  bank 
to  make  up  a  general  report  in  order  to  save  the  expense  of 
buying  reports  from  the  agencies.  Among  queries  pertinent 
under  the  circumstances  would  be:  the  frequency  or  reg- 
ularity of  the  customer's  deposits,  his  standing  at  the  bank, 
his  reputation  for  honesty  and  ability,  his  manner  of  settling 
bills  as  shown  by  the  notations  on  the  bank  checks,  whether 
he  allows  drafts  to  be  made,  and  whether  they  are  paid  when 
presented.  Another  question  which  should  be  asked  is 
whether  the  customer  owes  the  bank,  how  much,  and  if  se- 
cured. The  answers  to  this  series  will  mean  more  than  an 
entire  general  report,  for  if  the  customer  has  credit  with  the 

*See  Appendix,  Form  11. 


42 


CREDIT    OFFICE    ROUTINE 


bank  and  is  able  to  borrow  money  with  or  without  security, 
it  indicates  a  healthy  moral  condition  of  the  risk.  The 
amount  owing  can  be  checked  against  the  general  statement 
of  liabilities  obtained  with  the  reports  of  the  commercial 
agencies,  or  against  the  statement  of  the  customer  himself. 

Some  credit  men  regard  reports  from  a  bank  with  sus- 
picion; but  when  one  considers  the  general  reliability  of 
banks  there  is  no  reason  to  think  that  they  would  deliberately 
make  a  report  that  would  put  the  customer  in  any  other  than 
the  true  light  as  they  see  it.  Every  bank  desires  that  its  de- 
positors obtain  credit  and  maintain  it  when  procured.  A 
depositor's  success  is  of  mutual  advantage;  and  while  the 
judgment  of  the  bank  may  be  wrong  in  regard  to  its  de- 
positor, it  is  not  probable  that  a  bank  would  intentionally 
give  a  false  impression. 

It  is  not  wise  to  inquire  about  a  customer  from  his 
brother  merchant  in  town,  unless  the  credit  man  is  on  inti- 
mate terms  with  such  merchant  and  can  write  him  on  per- 
sonal grounds.  The  average  merchant  does  not  like  to  be 
put  in  the  attitude  of  passing  judgment  on  the  credit  of  a 
neighbor. 

Salesmen's  Reports  ^^ 

E^ch  salesman  should  be  furnished  with  a  blank  to  be 
filled  out  and  attached  to  each  order  he  sends  in.  The  blanks 
shown  in  the  Appendix*  provide  for  such  information  as 
the  salesman  can  gather  from  the  customer  and  from  per- 
sonal observation.  If  a  house  is  selling  within  a  small 
radius,  it  is  supposed  that  many  orders  will  be  taken  from 
merchants  of  limited  means.  Such  merchants  are  safe  risks 
when  the  credit  man  has  full  information  regarding  their 
financial  affairs.  Within  such  a  limited  area,  the  traveling 
salesmen  can  be  of  untold  help  to  the  credit  man.     When  a 


•Forms  i  and 


THE    CREDIT    OFFICE    MACHINERY  43 

careful  salesman  fills  out  his  credit  blank  he  takes  not  only 
the  references  given  by  the  customer,  but  he  looks  through 
the  stock  and  takes  the  names  of  the  houses  whose  goods  are 
on  the  shelves.  He  may  also  make  estimates  of  the  value 
and  size  of  the  stock,  the  general  character  and  condition  of 
the  business,  and  secure  other  items  of  information  that  will 
be  of  value.  It  is  well  for  the  credit  man  to  be  thoroughly 
informed  on  the  causes  of  failure,*  in  order  that  the  salesman 
may  supply  the  credit  office  with  the  important  facts  upon 
which  to  base  an  estimate  of  the  ability,  character,  and  gen- 
eral business  reputation  of  the  customer. 

The  Customer's  References 

Another  valuable  source  of  information  is  found  in  the 
references  furnished  by  the  credit  prospect.  Care  must  be 
exercised  with  respect  to  these,  for  it  is  only  human  for  a 
merchant  to  give  the  names  of  the  houses  with  which  he  is 
in  good  standing.  Such  references  should  be  checked  up 
against  the  salesman's  report,  and  the  credit  man  can  then 
write  to  other  houses  with  which  the  customer  deals.  The 
information  to  be  sought  from  the  trade  consists  principally 
of  ledger  experience,  which  includes:  "How  long  sold," 
"Highest  credit  extended," .."Amount  owing,"  "Amount 
due"  or  "past  due,"  and  any  other  items  of  general  informa- 
tion which  the  house  may  care  to  volunteer  as  a  courtesy. 
These  specific  requests  constitute  the  form  which  is  adopted 
and  recommended  by  the  National  Association  of  Credit 
Men.  If  the  house  is  a  member  of  that  body,  it  will  be  fur- 
nished at  cost  with  a  supply  of  suitable  blanks  on  which  to 
make  requests  for  information. 


►See  Chapter  XVIII. 


CHAPTER    IV 

CREDIT-GRANTING— THE   CUSTOMER 

Confidence  and  Credit 

It  is  significant  that  the  word  from  which  "credit"  is  de- 
rived has  for  its  meaning  confidence,  trust,  or  belief.  Credit 
may  be  defined  as  the  confidence  reposed  in  the  abiHty  and 
intention  of  the  purchaser  to  pay.  The  seller  believes  in  the 
solvency  or  probity  of  the  purchaser,  and  such  belief  is  the 
basis  on  which  any  credit  transaction  is  made.  If  goods  are 
delivered  on  the  strength  of  approved  security  taken  by  the 
seller  before  shipment,  the  transaction  is  not  one  of  credit  in 
the  strict  sense  of  the  word. 

The  confidence  giving  rise  to  credit  is,  among  credit  men, 
based  on  a  knowle<:lge  of  the  purchaser's  financial  resources, 
and  promptness  in  paying  his  debts ;  to  which  may  be  added 
as  still  more  important,  his  known  character  and  integrity. 
To  go  further  into  the  subject,  the  credit  man  must  have  con- 
fidence in  the  permanency  of  the  purchaser's  business  and  in 
his  ability  to  conduct  the  business  successfully.  The  object 
of  the  credit  man  is  practically  the  same  as  that  of  the  sales- 
man— to  sell  all  the  goods  he  can  at  a  profit,  with  due  regard 
for  safety.  Losses  come  from  taking  chances — but  so  does 
volume  of  sales;  and  a  good  credit  man  will  make  a  con- 
scientious effort,  within  the  bounds  of  safety,  to  ship  every 
order  that  comes  over  his  desk.  If  it  cannot  be  arranged  on 
credit  terms,  a  shipment  may  be  made  for  cash  or  on  ap- 
proved security. 

The  Basis  of  Credit-Granting 

The  basis  for  credit  varies  according  to  the  factors  con- 

44 


CREDIT-GRANTING— THE    CUSTOMER  45 

stituting  the  business  structure  of  the  firm  which  the  credit 
man  represents.  Such  factors  are:  the  location  of  the 
house  itself,  the  line  of  goods  it  carries  or  manufactures, 
class  of  customers,  the  particular  form  of  credit  ordinarily 
extended  with  reference  to  terms,  size  of  orders,  and  the 
margin  of  profit  on  which  its  goods  must  be  sold.  The  gen- 
eral principles  which  form  the  basis  of  credit  are  the  same 
for  all  lines  of  business;  but  in  the  discussion  of  its  indi- 
vidual factors  or  elements,  we  encounter  the  special  problems 
incident  to  any  particular  line;  and,  therefore,  where  credit- 
granting  assumes  different  aspects  dependent,  say,  upon  the 
size  or  extent  of  territory  covered,  it  becomes  subject  to  a 
separate  consideration. 

The  Customer's  Ability 

Credit  men  differ  as  to  what  constitutes  the  most  essen- 
tial basis  of  credit.  Each  man  puts  a  different  emphasis  on 
one  or  more  elements,  according  to  his  knowledge  and  ex- 
perience. One  may  lay  stress  on  ability,  another  on  char- 
acter, while  still  another  may  judge  a  risk  solely  on  the  finan- 
cial responsibility  of  the  purchaser — whether  he  is  legally 
"good,"  and  may  therefore  be  compelled  by  law  to  pay  his 
debts. 

By  ability  is  not  meant  merely  the  capacity  to  conduct 
a  business  properly.  It  also  includes  age,  health,  business 
experience,  education,- and  capacity  and  inclination  to  work. 
It  should  go  even  further,  including  an  inquiry  into  the  cus- 
tomer's knowledge  of  the  particular  business  or  the  lines  of 
goods  he  is  selling.  While  ability  is  necessary  to  success,  it 
must  be  remembered  that  there  are  large  numbers  of  mer- 
chants obtaining  credit  and  paying  their  bills  who  cannot  be 
said  to  be  of  marked  ability ;  and  still  they  are  looked  upon 
by  close  acquaintances  in  their  own  community  as  successful 
nierchants. 


46 


CREDIT    OFFICE    ROUTINE 


Integrity  Essential  to  Credit-Granting 

Ability  may  therefore  be  considered  as  a  desirable  at- 
tribute, but  it  cannot  be  compared  with  integrity  when 
judging  the  credit  of  a  customer.  Integrity  is  absolutely 
essential.  A  man  may  possess  ability  and  ample  assets,  but 
if  his  character  and  reputation  are  subject  to  question,  then 
from  a  credit  standpoint  he  is  a  "risk"  in  every  sense  of  the 
word.  As  tangible  assets  form  the  chief  basis  of  financial 
worth,  so  integrity  is  the  real  and  indispensable  basis  of 
credit.  If  a  credit  man  can  be  assured  of  his  customer's 
honesty,  all  other  considerations  are  merely  relative. 

When  it  comes  to  a  choice  between  the  honest  man  of 
small  means  and  the  man  of  large  resources  but  of  doubtful 
integrity,  the  honest  man  should  be  entitled  to  credit,  while 
to  the  man  of  doubtful  honesty  credit  should  be  denied. 

Investigation  of  Habits 

The  busy  credit  man  is  too  apt  to  accept  without  ques- 
tion the  brief  remarks  in  the  commercial  reports  as  to  the 
general  character  of  the  prospective  purchaser;  and  if  these 
state  that  the  subject  is  of  "good  habits  and  fair  ability"  he 
checks  the  item  and  passes  it  up.  An  investigation  might 
reveal  the  fact  that  while  the  subject's  habits  may  be  good 
most  of  the  time,  he  is  addicted  to  occasional  sprees  during 
which  his  business  suffers.  Drinking  is  not  the  only  dan- 
gerous habit,  but  is  mentioned  simply  by  way  of  illustration. 

When  interviewed  by  the  reporter  for  a  commercial 
agency,  a  merchant's  associates  and  commercial  neighbors, 
desiring  to  do  him  justice  in  regard  to  his  financial  affairs, 
usually  report  very  accurately  in  this  respect;  but  when  it 
comes  to  speaking  of  his  failings  and  bad  habits  they  do  not 
consider  this  an  important  part  of  the  report,  and  try  to  take 
a  charitable  view  of  the  case.  The  reporter  himself  is 
schooled  to  be  very  careful  in  dealing  with  information 


CREDIT-GRANTING— THE    CUSTOMER  47 

which  might  be  damaging  in  character  and  which  must  be 
supported  by  evidence  from  a  man's  home  town.  Even  a 
loose  character  can  often  obtain  witnesses  to  vouch  for  him, 
and  when  adverse  information  is  obtained  by  a  commercial 
agency  it  is  usually  handled  with  great  care,  and  the  report 
in  which  it  is  embodied  is  sent  to  the  inquirer  under  seal  or 
else  held  in  the  office  and  shown  only  to  the  inquirer  in  per- 
son for  his  exclusive  use.  Thus,  considering  the  difficulties 
under  which  character  investigations  are  made,  and  how 
hard  it  is  for  agencies  to  procure  absolutely  correct  informa- 
tion, it  is  always  well  to  make  this  matter  of  habits  the  sub- 
ject of  a  specific  confidential  question  when  writing  local 
authorities. 

In  this  connection,  also,  the  business  history  of  a  pros- 
pective customer  should  be  carefully  investigated.  Such  in- 
quiry should  consider  not  merely  his  past  record  regarding 
fires  and  failures,  but  his  previous  business  connections  and 
occupations,  and  his  personal  record  at  his  various  places  of 
residence. 

Appraising  the  New  Customer 

The  first  step  in  investigating  a  new  customer  is  to  con- 
sult the  rate  books  of  the  commercial  agencies.  The  second 
source  of  information  is  the  detailed  report  from  the  com- 
mercial agency,  giving  a  brief  history  of  the  business  and 
often  a  copy  of  a  signed  financial  statement.  This  report 
furnishes  a  basis  of  request  for  certain  specific  information 
from  attorneys  and  banks.  Such  reports  show  the  names 
and  ages  of  partners  and  whether  married  or  single.  The 
latter  is  important,  as  it  determines  the  amount  of  exemp- 
tions to  which  individuals  are  entitled,  and  such  exemptions 
reduce  the  net  worth  in  accordance  with  the  laws  of  the  vari- 
ous states. 

It  is  of  vital  importance  that  the  name  and  address  on 


48  CREDIT    OFFICE    ROUTINE 

the  report  agree  exactly  with  the  name  and  address  of  the 
request,  especially  in  large  cities  and  inaccessible  country  dis- 
tricts. Mistakes  are  often  made,  not  only  in  the  credit  de- 
partment in  calling  for  reports,  but  by  the  clerks  of  the  com- 
mercial agencies,  who  are  not  supposed  to  be  mind-readers, 
and  who  fill  carelessly  worded  requests  as  completely  as 
they  can. 

The  chief  objection  to  the  reports  of  commercial  agencies 
is  that  they  are  not  always  up-to-date.  Their  custom  is 
to  revise  twice  a  year;  but  if  a  merchant  submits  a  statement 
in  January,  it  is  not  probable  that  he  will  make  another  dur- 
ing the  same  year  unless  there  has  been  a  material  change  in 
the  business.  The  average  merchant  takes  inventory  only 
once  a  year  (if  then),  and  any  figures  taken  six  months  later 
can  be  only  guesswork.  It  is  seldom  that  a  statement  from 
a  small  merchant  deals  with  the  actual  inventory  figures. 
He  thinks  that  his  estimate  should  be  given  in  round  num- 
bers, and  from  this  the  credit  man  naturally  concludes  that 
the  whole  statement  is  purely  guesswork. 

Capital  and  Expenses 

The  question  of  capital  as  affecting  credit  should  con- 
sider the  way  in  which  the  customer  uses  it ;  whether  he  ties 
it  up  in  hard  accounts  or  hard  stock,  or  whether  he  restricts 
both  of  these  and  turns  his  capital  frequently.  In  judging 
a  credit  one  should  therefore  consider  his  information 
incomplete  until  he- has  definite  knowledge  of  the  volume  of 
business  transacted  yearly  by  the  customer  and  the  amount 
of  his  expenses.  If  the  credit  man  uses  his  own  form  for 
taking  a  property  statement  he  should  provide  spaces  for  an- 
nual rent  and  clerk  hire.  With  these  two  items  he  can  easily 
approximate  the  merchant's  total  expenses.  A  small  mer- 
chant may  not  keep  close  track  of  his  yearly  expense,  but  he 
can  always  tell  what  he  spends  for  rent  and  clerk  hire ;  and 


CREDIT-GRANTING— THE    CUSTOMER 


49 


the  size  of  the  business  will  indicate  what  amount  should  be 
allowed  for  other  operating  expenses.  If  the  total  given  by 
the  merchant's  report  shows  a  wide  variation  from  what  it 
ought  to  approximate,  an  inquiry  should  be  made  into  the 
reasons  for  the  discrepancy.  If  the  credit  man  will  make  a 
practice  of  such  investigations  he  will  soon  learn  to  tell  at  a 
glance  just  how  the  expense  item  should  stand.  It  becomes 
second  nature,  like  estimating  an  order  by  running  over  the 
order  sheets. 

Assets 

In  reading  the  asset  statement  of  a  report  on  a  merchant, 
due  allowance  should  be  made  for  shrinkage,  even  though  the 
report  states  that  this  allowance  has  already  been  made.  A 
stock  of  goods  under  the  hammer  is  never  worth  what  a 
merchant  can  obtain  in  the  ordinary  course  of  trade.  Ac- 
counts receivable  will  likewise  suffer  considerable  shrinkage 
if  the  merchant  should  for  any  cause  discontinue  business. 
The  item  of  furniture  and  fixtures,  except  in  a  large  business 
house,  is  mainly  valuable  in  connection  with  the  business  as 
a  going  concern.  The  small  merchant  usually  lists  his  fur- 
niture and  fixtures  at  first  cost,  and  the  credit  man  in  his 
mind  eliminates  a  cash  register  and  the  computing  scales. 
He  feels  that  they  are  there,  at  full  value,  but  perhaps  with 
a  lien  retained  by  the  manufacturers  until  all  the  lien  notes 
are  paid.  The  merchant  may.  not  have  them,  and  also  he 
may  not  have  a  big  stock  of  patent  medicines,  but  the  chances 
are  that  he  has  both.  In  this  class  of  report,  such  items  as 
live  stock,  farming  implements,  and  household  goods  must 
be  looked  at  with  suspicion,  for  in  many  cases  all  are  exempt. 
Any  other  assets  which  can  be  transferred  or  readily  dis- 
posed of  must  receive  their  share  of  attention  from  the 
credit  man. 

The  item  of  real  estate  in  a  report  should  be  noted  and 


50 


CREDIT    OFFICE    ROUTINE 


carefully  investigated.  The  agencies  exercise  great  care  in 
this  particular,  investigating  the  court  records  as  well  as  fol- 
lowing up  transfers,  mortgages,  and  other  changes  affecting 
title.  Real  estate  may  be  made  the  basis  of  a  specific  request 
when  writing  to  banks  or  lawyers.  It  is  better  to  spend  a 
dollar  or  two  establishing  facts  regarding  real  estate  than  to 
see  this  item  vanish  when  the  business  is  taken  in  hand  by  a 
trustee  or  assignee.  Along  with  the  laws  of  exemptions  the 
credit  man  should  read  the  various  statutes  governing  the 
rights  and  titles  to  real  estate,  as  every  state  has  its  own  laws 
on  these  matters. 

Liabilities 

An  equally  careful  study  should  be  made  of  the  liabil- 
ities. The  loans  from  banks  and  individuals  should  be 
checked  up  and  investigated  by  means  of  letters  to  the  banks 
and  lawyers.  If  it  is  a  very  small  concern  which  is  being 
investigated,  both  of  these  sources  should  be  asked  to  give  a 
list  of  other  inquiries  which  they  may  have  received  recently. 
It  is  important  to  establish  the  item  of  merchandise  indebt- 
edness as  far  as  possible,  and  this  leads  to  a  consideration 
of  the  information  to  be  derived  from  the  trade  through  an 
exchange  of  ledger  experiences.  This  is  so  broad  and  im- 
portant a  subject,  applying  as  it  does  to  the  million-dollar 
house  as  well  as  to  the  cross-roads  store,  that  it  is  specially 
treated  in  Chapter  IX. 

If  satisfactory  information  regarding  liabilities  cannot 
be  obtained  from  the  reports  of  the  commercial  agencies,  it 
is  well  to  ask  the  customer  for  a  signed  statement  on  a  blank 
specially  printed  for  this  purpose.  Very  often  the  small  mer- 
chant does  not  realize  the  purpose  of  a  statement  until  it  is 
explained  to  him.  He  does  not  know  how  to  fill  out  a  blank 
properly,  and  he  usually  regards  the  representative  of  the 
commercial  agency  with  suspicion.     A  tactful  and  friendly 


CREDIT-GRANTING— THE    CUSTOMER 


51 


letter,  however,  will  in  most  cases  bring"  the  desired  in- 
formation. When  the  statement  is  received  the  post-marked 
envelope  should  be  carefully  preserved,  and  on  this  should 
be  placed  the  signatures  of  at  least  two  responsible  parties 
who  can  testify  to  the  receipt  of  the  letter  through  the  mail. 
This  point  is  covered  more  specifically  in  Chapter  XL 

Insurance 

Another  consideration  of  vital  importance  in  granting 
credit  is  insurance,  for  insurance — or  the  lack  of  it — is  the 
reef  on  which  many  ventures  have  come  to  grief.  The 
great  majority  of  merchants  are  careless  about  insurance. 
Even  if  they  are  amply  covered,  few  ever  read  their  policies 
to  see  whether  they  are  written  alike.  So  profound  and  so 
widespread  is  the  ignorance  regarding  insurance  matters, 
that  practically  all  the  states  have  passed  laws  throwing  cer- 
tain restrictions  about  agents  and  companies.  Fortunately, 
these  laws  in  great  measure  protect  the  insured  against 
"wildcat"  insurance,  but  there  are  no  laws  which  protect  the 
merchant  against  his  own  carelessness  and  ignorance. 

Credit  men  have  long  recognized  the  necessity  for  bring- 
ing merchants,  especially  small  merchants,  to  realize  not 
only  the  importance  of  carrying  ample  insurance,  but  also 
the  advantage  of  reducing  the  hazard  of  their  own  risks  and 
thus  making  their  property  acceptable  to  the  insurance  com- 
panies. Country  stores  are  known  as  special  hazards,  and 
are  underwritten  by  very  few  companies ;  and  these  few  have 
been  able  to  show  but  little  profit  on  this  class  of  insurance. 
Unless  a  merchant  shows  enough  outside  assets  to  cover  a 
possible  loss  by  fire,  the  credit  man  takes  a  long  chance  when 
he  ships  to  an  uninsured  store. 

Local  Conditions 

In  connection  with  the  investigation  of  the  prospective 


52 


CREDIT    OFFICE    ROUTINE 


customer,  local  conditions  should  be  considered.  This  has 
reference  to  crops,  labor,  and  employment,  both  in  local  in- 
dustries and  on  public  works  in  the  customer's  immediate 
vicinity.  Competition  is  an  important  factor  when  consid- 
ering the  ability  of  the  customer  to  succeed'.  Reports  on 
these  conditions  may  be  obtained  by  direct  inquiry  from  au- 
thorities and  from  the  traveling  salesman,  especially  if  the 
customer  is  in  the  country  or  in  one  of  the  smaller  cities.  If 
the  order  is  from  one  of  the  trade  centers — that  is,  a  city  of 
considerable  size — late  information  regarding  local  condi- 
tions may  be  obtained  from  the  weekly  papers  issued  by  the 
commercial  agencies. 

General  Business  Conditions 

To  dismiss  the  subject  of  granting  credit  would  hardly 
be  advisable  without  a  few  words  as  to  the  general  conditions 
which  affect  business  as  a  whole.  The  credit  man  for  a 
small  grocery  concern  may  ask  what  he  has  to  do  with  the 
fluctuations  in  stocks  or  the  price  of  pig  iron.  He  has  his 
opinions  as  to  whether  business  will  be  good  or  bad  during 
the  next  few  months,  and  he  relies  on  his  ability  as  a  col- 
lector to  retrieve  his  errors  in  crediting  in  case  of  a  general 
financial  panic.  On  what  does  he  base  his  opinion  as  to  the 
future?  Doubtless  on  the  newspapers,  which  are  usually 
optimistic  in  regard  to  business,  and  report  the  conditions 
existing  from  day  to  day.  It  is  a  common  saying  that  a 
panic  comes  out  of  a  clear  sky  at  the  time  of  seeming  great- 
est prosperity.  When  the  panic  does  come  the  man  who 
has  been  "guessing"  usually  helps  to  keep  up  the  percentage 
of  the  ninety  per  cent  who  are  born  to  fail. 

Fundamental  conditions  can  be  analyzed  with  arithmetical 
precision.  The  daily  papers  report  bank  clearings,  crop 
conditions,  commodity  prices,  and  other  important  items. 
These  reports  mean  little  to  the  average  man,  who  usually 


CREDIT-GRANTING— THE    CUSTOMER  53 

makes  no  attempt  at  tabulating  and  comparing  them  from 
week  to  week  or  through  the  year.  To  compile  such  records 
would  require  more  time  and  money  than  the  average  busi- 
ness can  afford.  While  the  commercial  agencies  supply  some 
records,  they  have  not  gone  into  the  subject  of  tabulating 
and  forecasting  like  the  statistical  organizations  which  are 
now  developing  this  into  a  business. 


CHAPTER    V 

CREDIT-GRANTING— THE  HOUSE 

Classification  of  Business  as  to  Credit 

In  the  preceding  chapter  it  was  brought  out  that  the  basis 
for  credit  varies  according  to  the  factors  which  enter  into  the 
business  structure  of  the  house.  Having  briefly  considered 
these  factors,  and  discussed  credit  from  the  standpoint  of 
the  customer,  we  will  now  consider  the  application  of  the 
principles  of  credit-granting  to  a  business  in  operation.  For 
this  purpose  it  may  be  well  to  divide  the  various  classes  of 
business  into  three  groups : 

1.  The  local  jobber  who  operates  in  a  restricted  ter- 

ritory and  sends  his  salesmen  in  all  directions, 
covering  the  surrounding  territory  within  a  radius 
of  a  hundred  miles  or  possibly  two  hundred  miles 
from  the  home  base. 

2.  The  large  wholesale  and  specialty  house,  the  mill 

agent,  and  the  commission  house;  all  of  which 
operate  over  the  entire  country. 

3.  The  manufacturer,  who  might  be  included  in  the  sec- 

ond division,  as  he  sells  from  coast  to  coast;  but 
as  manufacturing  credits  are  somewhat  different 
from  the  credits  of  the  regular  jobber,  they  will 
form  the  third  division. 

1.  THE  LOCAL  JOBBING  HOUSE 
Credit  Conditions 


The  jobbing  houses  which  are  included  in  this  first  divi- 
sion are  principally  concerned  in  supplying  staple  goods, 

54 


CREDIT-GRANTING— THE    HOUSE  55 

such  as  groceries,  dry  goods  and  notions,  shoes,  clothing, 
hardware,  hats,  and  milHnery.  These  jobbers  work  thor- 
oughly, selling  goods  on  credit  to  almost  every  store  in  their 
territory.  They  bear  the  burden  of  selling  the  very  small 
trade,  which  is  not  solicited  by  the  big  houses  of  the  large 
trade  centers.  It  is  a  peculiar  fact  that  the  larger  and  better 
stores  in  such  restricted  territories  almost  invariably  refuse 
to  buy  from  their  local  jobbers,  preferring  to  go  to  distant 
markets  for  practically  everything  except  groceries.  The 
proprietor  feels  that  he  must  take  a  long  trip  to  a  large  city 
as  a  matter  of  advertisement.  His  customers  are  probably 
occasional  visitors  themselves  at  the  nearest  jobbing  center, 
and  they  like  to  feel  that  they  are  getting  their  merchandise 
from  a  distant  city  which,  they  imagine,  sets  the  fashion. 
In  this  way  the  cream  of  the  trade  is  in  large  measure  taken 
away  from  the  local  jobber,  purely  through  ignorance  and 
prejudice  on  the  part  of  the  buying  public. 

In  order  to  increase  the  volume  of  his  business,  the  local 
jobber  usually  takes  long  chances  and  sells  many  merchants 
who  are  not  technically  deserving  of  credit.  These  are  the 
cross-roads  stores,  which  do  not  carry  insurance  and  would 
not  do  so  even  if  they  could  get  it — stores  which  sell  on 
credit  to  neighbors  and  strangers  alike,  and  collect  their  ac- 
counts, not  "every  little  while,"  but  "some  time  perhaps." 
They  have  as  assets  but  little  more  than  a  small  stock,  some 
farming  land,  and  perhaps  their  store  buildings. 

With  such  conditions,  why  are  these  merchants  sold? 
What  excuse  have  they  for  being  allowed  to  remain  in  busi- 
ness ?  Simply  that  they  are  "long"  on  that  valuable  asset — 
integrity.  Such  merchants  will  always  make  a  desperate 
effort  to  pay  some  time,  and  the  jobber  may  be  said  to  fur- 
nish them  the  capital  with  which  to  run  their  business. 

The  credits  granted  by  the  local  jobber  might  properly 
be  styled  the  "hard  job  of  the  credit  man  who  does  every- 


56 


CREDIT    OFFICE    ROUTINE 


thing."  In  the  local  jobber's  business  the  credit  man  is 
usually  one  of  the  firm,  and  has  not  only  the  responsibilities 
of  the  credits  and  collections,  but  often  has  the  finances  to 
look  after  also,  and,  it  may  be,  the  supervision  of  the  of- 
fice as  well.  It  seems  useless  to  speak  of  avoiding  detail 
work  in  such  a  case,  but  just  as  sure  as  the  credit  man  with 
a  heavy  burden  already  on  his  shoulders  attempts  to  do  de- 
tail work  in  addition,  to  just  that  extent  is  he  lessening  his 
value  as  a  producer  of  results.  The  heavier  the  burden,  the 
more  time  does  he  require  for  thinking  and  planning.  It  is 
poor  economy  to  save  in  office  wages  and  lose  accounts  on 
the  books  from  inability  to  give  them  proper  attention  at  the 
right  time — which  means  all  the  time. 

The  weaker  the  customer  financially,  the  more  informa- 
tion should  the  credit  man  accumulate  for  his  file.  This 
is  a  case  in  which  all  the  information  must  be  obtained.  Not 
only  must  credit  reports  be  had  from  all  sources,  but  the 
traveling  men  must  be  trained  to  gather  every  possible  item 
of  information  that  might  indicate  success  or  failure.  Here 
it  might  be  added  that  with  the  grocery  jobbers,  while  the 
credit  lines  are  large,  the  terms  are  short,  and  the  salesman 
is  usually  a  collector.  The  small  profits  on  sales  should  be 
an  incentive  to  keep  losses  through  the  credit  department 
down  to  a  minimum. 

By  covering  a  small  territory  thoroughly,  the  credit  man 
comes  in  personal  contact  with  the  lawyers  and  banks,  and 
is  enabled  to  procure  their  assistance  and  co-operation  in  his 
work.  He  has  also  a  better  opportunity  to  meet  his  cus- 
tomers face  to  face,  and  there  is  nothing  like  a  personal 
heart-to-heart  talk  in  getting  a  purchaser  to  reveal  his  true 
condition.  This  calls  for  tact,  as  no  man  likes  to  be  taken 
into  a  private  office  and  put  through  an  inquisitorial  process, 
or  be  told  how  he  must  run  his  business  if  he  wishes  to  re- 
ceive credit  from  the  house. 


CREDIT-GRANTING— THE    HOUSE 


57 


When  the  credit  man  approaches  a  customer  with  sym- 
pathetic interest  and  succeeds  in  getting  him  to  talk  about 
his  own  affairs,  he  will  in  most  cases  obtain  more  informa- 
tion than  if  he  conducted  an  exhaustive  cross-examination. 
If  the  customer  does  the  talking  he  will  often  drop  items  that 
are  of  vital  importance,  and  which  would  not  be  thought  of 
by  the  credit  man  himself.  The  personal  element  enters 
strongly  into  business  of  a  local  nature,  and  the  small  mer- 
chant wants  to  feel  that  he  has  placed  himself  in  the  hands 
of  friends  to  whom  he  can  look  for  aid  if  he  requires  it.  If 
such  a  mutual  interest  is  created,  the  merchant  may  be  con- 
sidered a  permanent  customer  to  whom  a  certain  amount  of 
goods  can  be  sold  each  season.  Where  the  scope  of  its  op- 
erations is  limited  by  the  extent  of  its  territory,  the  house 
must  depend  on  these  permanent  customers  for  the  volume 
of  its  business. 

Credit  Precautions 

In  dealing  with  a  small  merchant  the  credit  man  must 
know  the  houses  from  which  the  customer  buys  other  lines 
of  goods.  He  must  know  their  attitude  toward  him  and 
their  general  policy  toward  customers.  The  reason  for  this 
is  apparent.  If,  for  example,  a  concern  is  carrying  the  mer- 
chant for  a  liberal  credit  on  clothing,  and  this  merchant  is 
also  dealing  with  a  grocery  house  which  has  a  reputation 
for  close  collections  and  harsh  methods  in  cases  of  weakness 
or  trouble,  it  is  well  to  watch  the  account  very  closely  and 
always  to  keep  an  anchor  to  windward,  as  it  were.  In  such 
a  case  it  would  be  well  for  the  credit  man  to  confer  with  the 
largest  creditors  in  staple  lines  and  learn  whether  they  would 
co-operate,  if  necessary,  to  carry  the  debtor  over  any  rough 
places.  If  the  debtor  cannot  depend  on  such  assistance,  it 
is  well  for  the  credit  man  to  reject  the  risk. 

As  mentioned  in  connection  with  the  investigation  of  the 


58  CREDIT    OFFICE    ROUTINE 

customer,  in  Chapter  IV,  local  conditions  which  might  have 
an  influence  on  the  credit  of  the  house  must  be  carefully  con- 
sidered. The  credit  man  must  have  information  constantly 
regarding  crops,  weather,  and  labor  conditions;  also  any- 
thing else  that  would  be  likely  to  affect  credit  conditions  in 
the  neighborhood  of  his  customers. 

Constructive  Credits 

Taking  up  again  the  advantage  of  a  close  personal 
knowledge  of  customers,  a  house  is  sometimes  able  to  adopt 
a  liberal  attitude  toward  a  merchant  who  is  to  all  appear- 
ances financially  weak,  because  of  its  intimate  knowledge  of 
the  conditions.  Bill  Jones  of  Cedar  Grove  may  show  little 
in  the  way  of  tangible  assets,  but  some  Saturday  night  when 
the  credit  man  is  going  over  the  accounts  with  the  salesman 
in  that  territory  the  latter  may  tell  of  a  personal  conversation 
he  has  had  with  a  relative  of  Jones,  who  is  much  interested 
in  his  success,  and  who  has  expressed  a  willingness  to  help 
Jones  whenever  called  upon.  When  Jones  gets  behind  in 
his  payments  this  relative  indorses  a  note,  and  the  country 
bank  discounts  it  and  thus  helps  the  local  jobber  with  whom 
Jones  is  dealing,  to  carry  him  until  he  collects  his  accounts 
or  sells  the  produce  taken  in  exchange  for  goods.  Such  in- 
formation as  this  is  of  the  greatest  practical  value  to  the 
credit  man. 

In  a  restricted  territory  the  credit  man  must  be  construc- 
tive— a  builder  of  business,  and  never  its  antithesis.  There 
are  hundreds  of  jobbers  throughout  the  country  who  have 
grown  rich  with  many  customers  like  Jones  on  their  books. 
In  the  case  of  the  local  jobber,  the  country  merchant  fur- 
nishes integrity,  a  part  of  the  capital,  and  the  ability  to  con- 
duct the  business,  while  the  jobber  provides  the  remainder 
of  the  capital  by  carrying  the  account  and  extending  liberal 
credits. 


CREDIT-GRANTING— THE    HOUSE  59 

2.  THE  LARGE  JOBBING  HOUSE 

Large  Jobber's  Advantages 

The  jobber  who  covers  the  entire  country  is  able  to 
solicit  a  much  better  class  of  trade  than  the  local  jobber,  be- 
cause the  line  of  goods  he  carries  is  far  more  extensive,  and 
because  his  establishment  in  one  of  the  large  trade  centers 
gives  himi  an  advantage  of  location.  As  the  large  jobber  is 
able  to  fill  every  v^ant  of  the  customer  in  his  line,  his  credits 
run  large;  but  his  customers  are  in  better  financial  condi- 
tion and  realize  that  good  credit  standing  results  from 
prompt  attention  to  business  obligations.  In  the  .matter  of 
collections  he  can  insist  upon  his  bills  being  met  at  maturity, 
because  the  stronger  a  merchant  becomes  financially,  the  more 
attention  he  gives  to  his  credit  standing.  It  must  not  be 
thought,  however,  that  the  work  of  the  credit  man  for  the 
large  jobber  is  so  much  easier  than  that  of  a  similar  official 
in  restricted  territory.  His  credits  being  larger,  individual 
losses  are  necessarily  far  greater,  and  continual  care  must 
be  exercised  in  opening  new  accounts  and  in  watching  these 
accounts  after  they  are  opened.  Another  thing  to-  be  given 
consideration  is  that  the  large  jobber  encounters  in  occa- 
sional accounts  in  the  large  towns  and  cities,  forms  of  dis- 
honesty which  are  not  practiced  in  the  rural  districts. 

Rating  the  Large  Buyer 

Mill  agents  and  commission  houses  sell  to  those  mer- 
chants who  are  able  to  use  goods  in  solid  cases  shipped 
direct  from  the  mills.  As  a  rule  such  shipments  are  billed 
on  short  time,  and  the  margin  of  profit  is  very  close;  con- 
sequently, such  credits  should  be  treated  as  in  a  class  by 
themselves.  One  loss  of  considerable  size  will  absorb  the 
profits  on  sales  running  into  many  thousands  of  dollars. 
The  credit  man  can  afford  to  take  little  chance  in  such  cases. 


6o  CREDIT    OFFICE    ROUTINE 

and  must  know  that  the  customer  is  not  only  sound  finan- 
cially, but  that  he  has  a  reputation  for  discounting  or  pay- 
ing promptly  at  maturity.  In  checking  through  a  com- 
mercial report  it  should  be  noted  whether  purchasers  of 
this  class  show  a  proper  ratio  in  quick  assets;  that  is, 
whether  a  reasonably  large  proportion  of  their  assets  can 
be  quickly  converted  into  cash.  Many  credit  men  consider 
that  two-thirds  of  the  assets  must  be  thus  quickly  con- 
vertible. Of  course,  there  must  be  an  ample  excess  of 
assets  over  liabilities  to  establish  the  financial  rating  which 
is  given  by  the  agencies.  But  the  mere  matter  of  safety 
is  not  the  only  consideration  in  this  class  of  credits,  for  the 
credit  man  is  also  looking  for  a  quick  turnover  in  his  own 
business.  In  judging  credit  he  must  look  to  the  agency 
report  for  evidence  of  the  customer's  ability  to  pay  promptly ; 
and  he  must  establish  the  facts  of  such  paying  record  by 
trade  information  and  interchange  of  credit  experience  with 
other  houses  selling  the  customer. 

S.  THE  MANUFACTURER 

Credit  Conditions 

The  subject  of  credit-granting  by  the  manufacturer 
should  be  considered  on  the  basis  of  the  classes  of  trade 
solicited  by  this  branch  of  business.  In  former  days  the 
manufacturer  sold  his  output  to  an  agent  or  to  the  large 
wholesale  houses,  and  on  such  a  basis  that  the  matter 
of  credit  gave  him  little  cause  for  worry.  Under  changed 
conditions  it  is  now  the  custom  for  some  of  the  largest 
factories  to  go  direct  to  the  small  merchant,  and  in  some 
instances  to  ignore  all  middle  men  such  as  mill  agents,  com- 
mission houses,  and  even  the  small  jobber. 

The  credits  of  a  manufacturer  are  similar  in  many  re- 
spects to  those  of  the  wholesale  house.    If  the  mill  sells  the 


CREDIT-GRANTING— THE    HOUSE  6l 

jobber,  and  the  jobber  in  turn  sells  the  small  trade,  it  would 
appear  that  the  credit  man  for  the  mill  had  practically  the 
same  work  to  perform  as  the  credit  man  for  the  wholesale 
house,  only  on  a  larger  scale.  His  sources  of  information 
and  the  methods  of  procuring  it  are  also  about  the  same ;  but 
the  credits,  being  much  larger,  must  be  handled  with  corre- 
sponding care  in  order  to  keep  down  the  percentage  of  loss. 

With  the  mill  there  is  another  point  of  view  to  be  con- 
sidered. If  it  is  putting  on  the  market  an  article,  either 
staple  or  in  the  class  of  luxuries,  the  object  is  to  cover 
thoroughly  every  point  in  the  country  that  can  be  reached 
in  an  advertising  campaign.  An  order  from  a  far  distant 
point  or  even  from  a  foreign  country  is  greeted  with  satis- 
faction as  indicating  that  the  public  is  responding  to  the 
advertising  and  that  a  demand  is  being  created.  The  local 
jobber,  on  the  other  hand,  views  with  suspicion  an  order 
from  beyond  the  immediate  limits  of  his  territory. 

A  further  distinction  between  jobber  and  manufacturer 
is  that  the  jobber  covers  his  territory  thoroughly,  while  the 
manufacturer  touches  only  those  cities  in  which  he  can  find 
choice  accounts,  which  will  in  turn  fill  the  small  orders  com- 
ing from  that  section.  The  field  of  the  manufacturer  is  un- 
limited, and,  as  a  rule,  he  can  select  the  choice  risks  among 
the  distributing  houses,  or  the  most  desirable  large  retail 
stores. 

This  is  not  always  true,  however,  for  sometimes  the 
manufacturer  introduces  a  line  of  goods  that  is  heavily  ad- 
vertised, and  the  sales  department  must  make  strenuous 
efforts  to  distribute  the  goods  so  that  they  will  be  con- 
veniently at  hand  when  the  demand  is  created.  Then,  in 
order  to  secure  a  representative,  the  credit  man  is  sometimes 
forced  to  accept  a  risk  that  he  does  not  want,  and  which  he 
must  watch  with  infinite  pains  as  long  as  the  account  stands 
open. 


62  CREDIT    OFFICE    ROUTINE 

Effect  of  Mill  Conditions  on  Credit 

Another  feature  that  the  credit  man  of  a  manufacturing 
house  must  consider  is  the  importance  of  keeping  the  mill 
going  steadily  at  an  even  output,  and  without  the  spurts  or 
shut-downs  which  are  so  disorganizing  to  a  business.  The 
mill  may  be  making  an  article  that  is  used  only  during  the 
cold  months,  but  it  must  manufacture  and  sell  this  article 
every  month  in  the  year.  The  retailer  buys  just  before  the 
cold  weather  sets  in,  but  since  it  is  manifestly  impossible  for 
the  mill  to  "do  all  its  manufacturing  and  shipping  in  two 
months,  the  credit  man,  by  making  long  terms  to  the  best 
jobbers,  makes  sales  in  the  other  months  of  the  year,  and 
thus  enables  the  mill  to  make  up  its  orders  and  case  the 
goods  on  a  somewhat  even  schedule.  Thus,  shipping  in- 
structions may  be  received  for  the  early  summer  and  even 
the  last  month  of  spring.  The  smaller  orders  and  those 
from  weaker  firms  can  be  held  up  until  near  the  time  for 
actual  consumption.  Here  there  must  be  the  closest  co- 
operation between  the  sales  and  advertising  departments  and 
the  credit  department. 

The  Responsibilities  of  the  Credit  Man 

The  credit  man  must  be  a  student  of  fundamental  con- 
ditions, not  only  for  an  intelligent  handling  of  credits,  but 
also  as  the  statistician  of  the  factory,  to  whom  the  depart- 
ments look  for  both  buying  and  selling  information.  If  the 
outlook  for  cotton  is  poor  he  directs  the  advertising  and  sell- 
ing campaign  into  the  wheat  belt  or  to  some  other  section  of 
the  country  where  conditions  are  better.  His  weekly  re- 
ports on  fundamental  conditions  show  where  business  is  to 
be  had  and  where  credit  conditions  are  good  or  bad.  A 
most  excellent  territory  in  early  spring  may  in  the  autumn 
be  a  veritable  valley  of  dry  bones  from  a  credit  standpoint ; 
and  the  credit  man  must  know  when  and  how  to  contract  his 


CREDIT-GRANTING— THE    HOUSE 


63 


sales  and  credits  and  withdraw  before  the  trouble  begins. 
In  planning  a  selling  campaign  the  credit  man  should  care- 
fully look  up  the  credit  ratings  of  the  prospects  along  the 
route  of  each  traveling  man  or  set  a  standard  of  just  what 
ratings  he  will  allow  on  his  customers'  list.  By  acting  in 
conjunction  with  other  departments  the  work  of  all  can  be 
made  much  easier  and  the  expense  ratio  materially  reduced. 
The  credit  man  for  a  manufacturing  house  must  have  an 
expert  knowledge  of  the  line ;  that  is,  not  only  of  the  goods 
themselves,  but  the  various  costs,  values,  and  margins  of 
profit  of  each  article,  and  also  the  stock  of  each  article  on 
hand.  If  the  factory  is  overloaded  with  a  line  that  bears  a 
liberal  profit,  it  goes  without  saying  that  the  credit  man  can 
afford  to  take  chances  that  he  would  not  take  otherwise. 
This  is  not  so  much  scientific  credit-granting  as  common 
sense. 

Favorable  Conditions  of  Manufacturer's  Credits 

In  one  particular  the  credit  man  of  a  manufacturing 
establishment  has  an  advantage  over  the  same  official  in  the 
wholesale  house.  Orders  are  usually  taken  before  the  goods 
are  made,  and  the  credit  office  has  opportunity  to  investigate 
and  pass  on  the  orders  long  before  the  shipping  date ;  while 
with  the  wholesale  house  the  majority  of  orders  are  for  im- 
mediate shipment,  and  the  work  of  investigation  must  be 
conducted  with  little  delay.  When  a  factory  order  has  been 
received  it  can  be  listed  and  reported  to  the  various  agencies 
and  interchange  bureaus,  and  much  valuable  information 
often  accumulates  automatically  through  the  answers  to  in- 
quiries.   This  is  discussed  more  fully  in  Chapter  IX. 

Another  advantage  enjoyed  by  the  large  manufacturer 
is  in  the  collection  of  accounts.  If  the  mill  is  selling  large 
customers,  they  expect  to  pay  promptly,  and  if  remittance 
is  not  received  on  the  due  date  the  credit  man  feels  no  hesi- 


64 


CREDIT    OFFICE    ROUTINE 


tancy  in  pursuing  the  matter  till  payment  is  made.  A  state- 
ment is  mailed  on  the  day  the  bill  is  due,  calling  attention  to 
the  fact.  If  not  paid  by  return  mail  the  second  statement 
is  an  advance  notice  of  a  draft  through  the  bank.  Instead 
of  waiting  and  worrying  with  the  debtor,  as  must  the  small 
jobber,  the  manufacturer  is  in  position  to  demand  prompt 
payment  when  his  bills  are  due.  On  the  other  hand,  if  he 
is  dealing  with  the  very  small  trade  and  selling  direct  to  the 
dealer  instead  of  to  the  large  houses,  the  credit  man  has  all 
of  the  troubles  of  the  small  jobber  added  to  those  which 
come  to  him  rightfully  by  nature  of  his  line  of  business. 
The  course  to  be  pursued  in  collections,  in  this  event,  is 
practically  the  same  as  with  the  jobber. 

The  Instalment  Trade 

One  particular  branch  of  trade  which  has  grown  to 
enormous  proportions  in  recent  years,  and  which  is  sold  by 
jobber  and  manufacturer  alike,  is  the  instalment  business. 
The  houses  engaged  in  this  trade  carry  a  stock  and  sell  on 
the  plan  of  a  cash  payment  on  delivery  and  a  stated  sum 
each  week  or  month,  the  title  to  the  goods  being  retained 
until  full  payment  is  made.  When  the  instalment  house 
carries  a  fair  stock  the  credits  are  similar  to  those  of  a  house 
of  the  same  size  in  the  regular  lines. 

Among  the  instalment  merchants  there  is  a  class 
known  as  "the  soft-goods  trade."  These  dealers  usually 
sell  blankets,  bedspreads,  rugs,  carpets,  curtains,  and  such 
merchandise.  The  business  is  done  through  agents  or 
house-to-house  canvassers,  who  are  practically  high-class 
peddlers.  Such  houses  carry  only  enough  stock  to  keep  the 
agents  supplied  for  a  few  days,  and  shipments  are  made 
at  frequent  intervals  from  the  source  of  supply — the  jobber 
or  manufacturer.  A  financial  statement  of  such  a  house 
shows  a  few  hundred  dollars  in  goods,  possibly  the  same 


CREDIT-GRANTING— THE    HOUSE  65 

amount  in  fixtures,  such  as  horses  and  wagons,  and  then, 
as  a  surprise,  many  thousand  dollars  in  accounts  receivable. 
These  accounts  are  secured  by  liens,  and  the  purchasers  pay 
if  they  can ;  but  if  the  goods  must  be  taken  back  by  the  dealer 
there  is  some  loss  in  selling  them  again  at  second  hand.  Un- 
der these  circumstances  the  accounts  admit  of  considerable 
shading  to  get  at  a  true  basis  for  valuation ;  often  they  are 
cut  from  one-third  to  a  half;  and  even  then  these  accounts 
are  valuable  as  assets  only  to  a  going  concern. 

In  judging  instalment  house  credits,  one  must  consider 
character  and  integrity  above  everything.  The  credit  man 
must  know  beyond  a  doubt  that  the  dealer  is  honest  and  in- 
tends to  pay  over  his  collections  to  his  creditors.  After  this 
fact  is  established,  the  rest  depends  on  the  ability  of  the 
dealer  to  pay  promptly.  He  sells  his  goods  at  an  enormous 
profit,  but  of  course  there  is  a  heavy  expense  in  his  method 
of  doing  business,  as  the  canvassers  work  on  a  high  rate  of 
commission. 

One  advantage  in  instalment  house  credits  lies  in  the 
fact  that  the  instalment  houses  confine  their  purchases  to  a 
very  few  concerns,  usually  selecting  one  source  of  supply  for 
each  line  carried.  Under  such  circumstances  the  credit  must 
necessarily  be  large,  but  if  care  is  exercised  in  looking  up  the 
record  of  the  dealer  and  he  is  proved  honest  beyond  ques- 
tion and  remains  so,  there  is  not  much  chance  for  loss.  So 
long  as  local  conditions  remain  satisfactory,  the  instalment 
collections  are  good  and  the  dealer  pays ;  but  if  strikes,  lock- 
outs, bad  weather,  or  other  misfortunes  interfere  with  work 
among  the  laboring  class,  then  the  dealer  suspends  his  selling 
and  devotes  all  his  time  to  collections,  which  fall  off  in  pro- 
portion to  the  amount  of  trouble  existing  in  the  locality. 
This  spells  trouble  for  the  houses  which  are  carrying  the 
dealer's  accounts,  and  the  credit  man  or  collection  manager 
will  have  need  of  all  his  skill  to  avoid  a  loss. 


CHAPTER    VI 

BANK    CREDITS 

Basis  of  Bank  Credit 

The  banks  have  been  somewhat  slow  to  follow  mercantile 
institutions  in  establishing  independent  credit  departments 
to  assist  the  officers  in  making  loans.  This  is  due  to  the  fact 
that  bank  credits  were  formerly  confined  almost  entirely  to 
local  propositions  well  known  to  the  bank,  and  there  was  no 
need  for  a  special  credit  department.  The  smaller  banks, 
whose  loans  are  purely  local,  still  depend  upon  a  personal 
acquaintance  with  the  borrowers.  In  the  smaller  cities,  also, 
it  is  possible  for  the  president  or  cashier  of  a  bank,  or  even 
for  the  directors,  to  obtain  an  intimate  knowledge  of  the 
affairs  of  its  customers,  and  transactions  are  based  largely 
upon  such  personal  knowledge.  There  is  no  occasion  to 
gather  the  mass  of  credit  information  necessary  for  the 
banks  of  large  cities,  which  carry  on  their  books  great  num- 
bers of  customers  widely  scattered  over  the  country. 

Many  institutions  in  these  days  find  it  convenient  and 
profitable  to  invest  surplus  funds  in  both  industrial  and  rail- 
way bonds  for  long-time  investments ;  also  to  buy,  through 
brokerage  firms,  commercial  paper  made  by  concerns  located 
in  distant  cities.  The  investigation  in  all  these  cases  must 
be  thorough  and  searching,  and  it  is  the  duty  of  the  credit 
man  of  the  bank  to  make  them.  It  is  also  his  duty  to  analyze 
the  various  financial  statements  that  come  to  his  desk,  and 
to  prepare  condensed  reports  for  the  convenience  of  the  loan- 
ing officers. 

Bank  Credits  and  Mercantile  Credits 

While  the  system  of  banking  credits  is  based  upon  the 

66 


BANK    CREDITS  67 

same  theory  as  mercantile  credits,  and  while  the  methods  of 
accumulating  information  may  be  similar,  there  is  still  some 
distinction  between  the  two.  A  house  dealing  in  merchan- 
dise is  permitted  a  wider  scope  and  can  deal  on  more  liberal 
terms  than  the  bank,  which  deals  purely  in  financial  credits, 
because  it  has  a  wider  margin  of  profit  and  can  therefore 
stand  heavier  losses.  Nor  will  such  losses  materially  affect 
its  financial  standing,  for  they  are  expected  and  arranged  for 
in  the  general  course  of  business.  On  the  other  hand,  losses 
met  by  a  bank  through  mistaken  credits  not  only  mean  a  loss 
of  money,  but  may  seriously  affect  the  standing  of  the  bank 
in  the  minds  of  its  depositors.  This  is  the  more  apt  to  be 
the  case,  because  bank  deposits  come  from'  all  sorts  and  con- 
ditions of  men,  and  these  depositors  do  not  always  under- 
stand that  when  they  put  their  money  in  the  bank  they  ex- 
tend to  the  bank  the  privilege  of  loaning  this  money  on 
commercial  risks. 

One  of  the  most  important  distinctions  between  the  work 
of  the  mercantile  credit  man  and  the  same  official  in  a  bank, 
lies  in  the  fact  that  the  former  concentrates  his  efforts  on 
learning  one  particular  line  of  merchandise,  while  the  credit 
man  of  the  bank  must  know  as  many  different  lines  as  are 
carried  by  the  various  customers  of  the  bank.  In  a  whole- 
sale dry-goods  house  the  credit  man  has  only  to  base  his 
credits  on  dry-goods  values ;  but  the  credit  man  of  the  bank 
must  have  a  general  comprehension  of  the  values  of  all  mer- 
cantile assets. 

The  Bank  Credit  Man 

The  credit  man  of  the  bank  must  be  able  to  analyze  the 
financial  statements  submitted  to  him,  to  separate  the  fixed 
assets  from  the  quick  assets  and  to  place  a  correct  valuation 
upon  each  class.  He  must  also  understand  how  to  arrive 
at  a  correct  valuation  of  all  such  assets  when  sold  under  the 


68  CREDIT    OFFICE    ROUTINE 

hammer.  He  must  understand  not  only  the  trade  conditions 
which  affect  credits  of  a  purely  local  nature,  but  he  must  also 
be  a  student  of  fundamental  trade  conditions  throughout  the 
country.  Beyond  everything  else  he  must  be  absolutely 
loyal  to  his  bank  and  must  appreciate  to  the  fullest  extent  the 
confidential  relations  existing  between  the  bank  and  its  cus- 
tomers. 

Functions  of  the  Bank  Credit  Department 

Nothing  better  illustrates  the  wonderful  development  of 
business  in  recent  years  than  the  numerous  securities  offered 
from'  day  to  day  by  the  larger  investment  bankers  and 
brokers,  and  the  degree  to  which  the  great  banking  establish- 
ments have  expanded  their  operations  through  syndicate 
banking  and  various  forms  of  business  alliances.  In  this  the 
credit  departments  of  these  banks  have  played  an  important 
part,  not  only  in  assisting  their  customers  in  establishing 
credit  in  distant  trade  centers,  but  also  in  assisting  the  smaller 
banks  in  the  purchase  of  commercial  paper  or  in  making 
other  investments  through  brokers,  and  in  obtaining  informa- 
tion concerning  various  credit  matters.  They  also  serve  as 
a  medium  for  exchanging  credit  information  with  other 
banking  institutions  and  commercial  agencies.  Collections 
and  other  business  for  out-of-town  houses  are  frequently  the 
result  of  courtesies  extended  by  the  credit  departments  of 
such  banks,  and  it  sometimes  happens  that  valuable  business 
comes  to  the  banks  themselves  through  these  services  of  their 
credit  departments. 

In  mercantile  credits  the  credit  man  is  responsible  not 
only  for  gathering  correct  information,  but  also  for  the 
actual  granting  of  credit.  In  a  bank,  owing  to  its  peculiar 
organization,  the  actual  making  of  loans  comes  under  the 
province  of  a  special  officer,  and  such  loans  are  passed  upon 
by  a  committee  of  directors.     The  credit  department  there- 


BANK    CREDITS 


69 


fore  furnishes  its  information  to  the  loaning  officer,  who 
must  then  treat  each  risk  upon  its  individual  merits. 

Credit  Information 

Very  full  information  is  essential  for  the  proper  granting 
of  bank  credits.  In  order  to  have  this  more  readily  acces- 
sible, some  banks  have  a  card  index  on  which  is  kept  a  great 
deal  of  information  condensed  from  the  larger  files.  This 
would,  however,  seem  merely  a  duplication  of  work  already 
done  and  may  well  be  dispensed  with. 

As  to  the  information  to  be  collected  and  filed  for  credit 
purposes  it  is  well,  first,  to  tabulate  for  each  customer  on  a 
properly  ruled  sheet  the  following  data,  which  is  drawn  from 
the  books  of  the  bank  itself : 

Balance 

Maximum  and  minimum  loans  by  month  and  year 

Accounts  which  are  influenced 

Securities  pledged  with  the  bank 

Dates  of  overdrafts 

Checks  returned  for  any  cause 

Trade  references  and  inquiries 

In  the  case  of  a  new  account  with  a  commercial  concern, 
the  information  file  should  be  started  as  soon  as  the  account 
is  opened.  For  this,  complete  data  should  be  obtained  in 
the  form  of  commercial  agency  reports  and  other  credit  in- 
formation, in  order  to  be  prepared  to  begin  negotiations  with 
the  customer  should  he  desire  to  borrow  money  from  the 
bank.  Such  information  is  also  useful  in  answering  credit 
inquiries  sent  to  the  bank  by  firms  from  which  the  customer 
may  desire  to  obtain  credit.  It  is  presumed  that  when  the 
customer  desires  to  borrow  money  from  the  bank  he  will  be 
prepared  to  show  a  statement  of  his  financial  affairs  made 
up  from  his  own  books,  which  will  supplement  the  informa- 


70  CREDIT    OFFICE    ROUTINE 

tion  on  file  and  which  can  be  used  to  check  against  such  in- 
formation. 

Many  of  the  smaller  banks  depend  on  the  judgment  of 
one  officer  or  a  few  officers  who,  by  daily  contact,  are  in  the 
habit  of  acquiring  all  the  information  necessary  on  the  bor- 
rowing customers  of  the  banks.  This  information  would 
be  much  more  complete,  however,  if  regular  files  were  opened 
and  one  man  in  the  bank  were  designated  to  place  credit  in- 
formation in  these  files  as  a  part  of  his  daily  routine  work. 

An  important  credit  sheet  may  be  compiled  by  tabulat- 
ing a  comparison  of  statements  furnished  at  regular  inter- 
vals by  the  customer.     This  sheet  should  cover : 

Fixed  resources 

Quick  assets 

Net  worth 

Current  liabilities  for  merchandise 

Short-term  notes 

Long-time  liabilities 

Ratio  of  quick  assets  to  liabilities 

Volume  of  business  transacted 

Expenses  (classified) 

Such  other  information  as  would  be  obtained  on  a  mer- 
cantile account  should  also  be  obtained  along  lines  that  would 
apply  to  the  financial  resources  of  the  customer,  his  manner 
of  conducting  business;  if  a  corporation,  the  standing  and 
worth  of  its  officers;  and  other  items  that  would  tend  to 
influence  the  credit  of  the  bank. 

Having  gathered  the  necessary  details,  comparison  can 
be  made  from  year  to  year  showing  with  what  degree  of 
ability  the  merchant  is  conducting  his  affairs.  The  form 
itself  may  be  so  arranged  that  fluctuations  in  the  various 
items  of  the  statement  will  be  readily  shown.  Usually  the 
customer  brings  the  statement  to  the  bank  in  person,  and  an 


BANK    CREDITS  71 

Opportunity  is  thereby  afforded  to  go  over  it  with  him  and 
to  discuss  its  features  and  review  the  operations  of  the  busi- 
ness since  the  date  of  the  last  statement.  In  this  way  much 
information  is  gained  which  could  hardly  be  obtained  in  a 
report  or  statement  from  the  customer. 

Should  the  customer  be  interested  in  any  concerns  which 
are  borrowers  from  the  bank,  there  should  be  some  form  of 
report  to  show  the  aggregate  borrowings  of  all  these  com- 
panies, as  well  as  the  aggregate  sum  against  which  the  cus- 
tomer is  held  as  indorser.  This  record  is  similar  to  the  line 
sheet  of  a  fire  insurance  company,  which  shows  the  amounts 
of  all  the  policies  of  the  company  in  a  certain  block  or  dis- 
trict subject  to  the  same  fire  hazard.  No  matter  how 
wealthy  an  indorser  of  this  kind  may  be  it  is  good  policy 
to  know  the  aggregate  amount  of  his  indorsements. 

The  credit  departments  of  many  banks  maintain  follow- 
up  records  in  soliciting  new  accounts,  both  mercantile  and 
banking.  This  is  a  natural  precaution,  as  the  bank  would 
hardly  want  to  open  negotiations  with  any  concern  that 
might,  on  investigation,  prove  to  be  undesirable. 

When  the  customers  of  a  bank  are  brought  to  realize 
that  true  and  exact  information  is  the  basis  of  confidence, 
and  when  they  see  that  their  own  frankness  will  bring  about 
liberal  treatment  from  the  bank,  they  will  readily  supply  the 
information.  Thus  customers  and  officials  will  be  brought 
closer  together  on  a  foundation  of  mutual  trust  and  con- 
fidence. 

A  "Live"  Report — French  Method 

The  files  should  be  kept  alive  by  brief  notations  from  time 
to  time  concerning  borrowing  arrangements,  trade  informa- 
tion, and  various  data  affecting  the  credit  or  financial  ability 
of  the  customer.  If  a  report  has  been  obtained  from  a  com- 
mercial agency,  such  agency  will  furnish  on  pink  slips  the 


72  CREDIT    OFFICE    ROUTINE 

records  of  suits  and  of  judgments,  mortgages,  and  such  data 
as  would  appear  on  record  in  a  county  clerk's  office.  Such 
information  can  also  be  obtained  from  newspapers  and  other 
sources  and  verified  before  filing. 

In  France  the  bankers  carry  much  fuller  information 
files,  which  are  more  completely  systematized  than  in  this 
country.  Each  customer  of  a  French  bank  is  assigned  a 
large  envelope  (le  dossier),  and  every  scrap  of  information 
about  the  customer  that  can  be  obtained  during  his  business 
life  time  is  placed  therein.  Newspaper  clippings,  records 
of  gossip  among  business  men,  impressions  obtained  by  the 
officer  of  the  bank  from  conversations  either  with  the  cus- 
tomer or  his  neighbors  and  business  associates,  are  all  in- 
cluded ;  in  fact,  the  bank  "dossier"  could  almost  be  compared 
to  the  records  in  a  foreign  detective  office. 

Practical  Uses  of  Bank  Records 

An  important  feature  in  the  practical  operation  of  the 
credit  department  is  the  daily  conference  of  the  loaning  of- 
ficers. For  this  purpose  the  credit  man  prepares  a  state- 
ment showing  a  list  of  all  maturing  bills,  and  against  each 
name  he  shows  the  average  balance  and  other  items  regard- 
ing the  account  of  the  customer  which  the  loaning  officers 
might  need  to  keep  before  them  to  show  how  the  customer 
is  handling  his  account.  The  various  files  are  also  kept  at 
hand  so  that  all  the  credit  information  may  be  laid  before 
the  officers. 

A  file  is  likewise  kept  of  the  country  banks  or  corre- 
spondents, of  whom  it  is  desirable  to  have  a  complete  record 
brought  down  to  date,  in  order  to  facilitate  the  handling  of 
all  business  with  the  institution.  This  comparison  sheet  for 
a  bank  will  exhibit  many  of  the  particulars  found  on  a  reg- 
ular customer's  sheet,  such  as  the  date  of  opening  the  ac- 
count, by  whom  introduced  or  solicited,  the  average  balance, 


BANK    CREDITS  73 

and  the  maximum  and  minimum  loans  by  month  and  year. 
Of  course,  the  rulings  on  these  sheets  to  show  a  comparison 
of  statements  will  be  specially  adapted  to  banks. 

Bankers  Promote  Sound  Business 

A  banker  is  not  concerned  merely  in  obtaining  interest 
on  the  funds  of  the  bank;  he  is  also  a  promoter  of  sound 
business  principles  among  his  clientele.  He  is  not  only  a 
conserver  but  a  builder  of  business,  for  by  granting  credit 
to  his  customers  he  assists  in  their  success.  Furthermore, 
the  banks  of  today  are  not  only  great  factors  in  the  upbuild- 
ing of  business,  but  they  are  taking  a  most  important  part 
in  introducing  sound  credit  principles  among  all  classes  of 
customers. 

Stock  and  Bond  Investments 

The  credit  man  of  the  bank  is  often  called  upon  to  pass 
upon  the  desirability  of  various  forms  of  outside  invest- 
ments, such  as  permanent  investments  in  the  shape  of  high- 
grade  industrial  and  railway  bonds  and  short-term  invest- 
ments such  as  prime  commercial  paper. 

Bonds  are  usually  bought  through  brokers  of  established 
reputation,  who  are  always  prepared  to  supply  full  informa- 
tion concerning  the  worth  of  these  securities.  Where  the 
purchase  of  an  industrial  bond  issue  is  in  question  a  thor- 
ough investigation  of  the  business  itself  should  be  made, 
going  back  of  the  date  of  the  present  financial  statement  fur- 
nished by  the  broker,  to  determine  whether  the  concern  has 
been  making  or  losing  money  over  a  period  of  years. 

The  main  source,  however,  of  information  on  an  indus- 
trial corporation  is  an  audit  of  the  concern  by  a  certified 
public  accountant.  When  such  a  statement  is  received  the 
credit  man  makes  a  thorough  analysis,  separating  the  fixed 
from  the  quick  assets,  and  the  general  indebtedness  from  the 


74 


CREDIT    OFFICE    ROUTINE 


bonded  indebtedness.  If  the  last  named  comprises  several 
different  issues,  the  characters,  rates,  and  dates  of  matur- 
ities of  each  issue  are  noted,  together  with  transcripts  of  the 
by-laws  or  resolutions  of  the  directors  regarding  the  estab- 
lishment of  a  sinking  fund  with  which  to  retire  the  bonds  as 
they  fall  due.  The  opinion  of  some  firm  of  reputable  at- 
torneys regarding  the  legality  of  the  issue  may  also  be  ob- 
tained. In  the  analysis  of  the  accountant's  statement  some 
attention  should  be  paid  to  the  conditions  governing  the  issue 
of  preferred  stock. 

Railroad  bonds  as  well  as  state,  county,  and  municipal 
bonds  also  offer  very  attractive  returns  as  permanent  invest- 
ments. So  many  books  and  pamphlets  have  been  written  on 
the  subject  of  bonds  and  how  to  judge  them  that  the  subject 
will  be  dismissed  briefly.  As  in  the  case  of  industrial  bonds, 
statements  concerning  the  financial  and  legal  status  of  rail- 
way or  municipal  bonds  can  usually  be  obtained  fromi  the 
broker,  as  well  as  any  other  information  regarding  the  gen- 
eral subject  of  judging  the  values  from  an  investment  stand- 
point. The  advantage  in  buying  the  better  class  of  railroad 
bonds  is  that  they  are  listed  on  the  stock  exchanges,  and 
usually  when  stocks  are  high,  bonds  are  low,  and  some  very 
good  and  safe  issues  can  be  bought  at  figures  which  will 
yield  a  good  return  on  the  money  invested. 

Commercial  Paper 

One  of  the  most  desirable  forms  of  investment  for  banks 
is  prime  commercial  paper.  The  selling  in  the  open  market 
of  commercial  paper  through  brokers  is  a  development  of 
comparatively  recent  years,  and  is  but  another  illustration 
of  the  wonderful  evolutiori  and  broadening  of  the  basic  prin- 
ciples of  the  general  business  of  this  country.  Owing  to  a 
lack  of  elasticity  in  the  national  currency  system  and  on 
account  of  the  fact  that  there  was  no  central  banking  insti- 


BANK    CREDITS 


75 


tution  to  fix  the  rate  of  discount,  previous  to  the  passage  of 
the  present  currency  act,  the  rates  of  commercial  paper  fluc- 
tuated throughout  the  year  almost  with  the  irregularity  of 
stocks  and  bonds;  but,  of  course,  without  the  same  great 
ranges  in  maximum  and  minimum.  This  was  the  principal 
reason  for  the  former  small  market  for  commercial  paper. 

The  prime  requisite  in  banking  being  liquid  assets,  a  large 
proportion  of  its  assets  must  consist  of  securities  which  can 
readily  be  converted  into  money.  There  is  no  form  of  in- 
vestment which  oiifers  such  an  opportunity  for  quick  and 
regular  liquidation  coupled  with  safety  of  investment,  as 
high-grade  paper,  maturing  as  it  usually  does  within  a  few 
months  from  the  date  of  issue.  As  to  the  first-named  ad- 
vantage, such  paper  is  met  at  maturity,  since  there  is  no 
obligation  on  the  part  of  the  bank  to  renew,  and  the  banker 
can  choose  from  the  broker's  list  just  such  maturities  as  will 
suit  his  need  for  money  at  various  intervals.  If  at  the  end 
of  such  time  it  is  necessary  to  use  this  money  for  other  pur- 
poses, he  can  depend  on  the  paper  being  taken  up ;  or  if  not 
needed,  another  purchase  of  paper  can  be  made,  bearing  such 
maturity  dates  as  would  constitute  another  period  to  be 
reckoned  with. 

Relation  of  Banker  and  Broker 

Of  great  assistance  to  the  credit  man  of  the  bank  is  the 
broker  himself.  Purchases  of  securities  should  be  made 
only  from  brokers  of  established  reputation  and  integrity  in 
the  financial  district.  The  best  brokers  will  naturally  con- 
trol paper  from  the  best  class  of  borrowers,  and  these  brokers 
are  often  on  intimate  terms  with  the  borrowers  themselves. 
In  many  cases  the  brokers  bear  the  same  relation  to  the  bor- 
rowers as  do  their  home  banks ;  the  brokers  take  care  of  the 
quick-maturing  loans  on  the  open  market,  and  the  home  bank 
furnishes  the  long-time  loans  which  are  renewed  throughout 


7(^ 


CREDIT    OFFICE    ROUTINE 


the  year.  Therefore  it  is  not  a  good  idea  for  the  buying 
bank  to  deal  with  the  maker  of  commercial  paper  direct ;  for, 
should  an  intimacy  spring  up  from  such  relations,  there  may 
be  an  obligation  on  the  part  of  the  bank  to  renew  or  repur- 
chase paper  at  maturity,  which  would  defeat  the  purpose  of 
buying  for  quick  liquidation. 

The  broker  has  always  at  hand  full  and  complete  in- 
formation concerning  the  financial  worth  and  integrity  of 
the  makers  of  the  paper  he  handles.  Before  he  attempts  to 
dispose  of  paper  he  usually  requires  a  detailed  report  of  an 
audit  of  the  books  by  a  certified  public  accountant,  together 
with  a  financial  statement  made  by  the  concern  itself  for  the 
purpose  of  establishing  a  line  of  credit.  The  several  refer- 
ences of  the  concern  are  consulted,  together  with  trade  in- 
formation generally;  and  more  important  still,  a  thorough 
investigation  is  made  by  the  traveling  representative  of  the 
broker.  As  the  broker  virtually  vouches  for  his  client,  he 
must  be  absolutely  sure  of  his  financial  worth  and  integrity. 
Very  frequently  the  broker,  when  taking  paper  to  sell  for  a 
client,  advances  for  his  immediate  use  the  proceeds  of  such 
paper  based  on  the  ruling  quotation  at  that  date  and  subject 
to  adjustment  when  the  paper  is  sold  in  open  market.  If 
the  broker  demonstrates  his  faith  in  his  client  in  such  man- 
ner the  credit  man  of  the  bank  can  have  no  better  assurance 
of  that  client's  reliability. 

Rating  Commercial  Paper 

In  judging  the  quality  of  the  paper  ofifered,  the  credit 
man  looks  in  the  statement  for  a  healthy  excess  of  quick  as- 
sets over  liabilities.  There  should  be  a  showing  in  quick 
assets  of  not  less  than  two  to  one  and  even  greater.  He  must 
be  sure  that  the  concern  is  able  and  expects  to  meet  the  note 
at  maturity.  Investigation  may  show  the  borrower  to  be  a 
holder  of  real  estate  of  undoubted  value,  but  that  he  may  be 


BANK    CREDITS 


17 


cramped  for  readly  working  capital.  A  house  that  borrows 
in  the  open  market  is  supposed  to  do  so  at  certain  periods  of 
the  year,  for  the  purpose  of  anticipating  its  purchases  and 
making  a  profit  on  the  transaction.  As  its  goods  are  con- 
verted and  its  accounts  receivable  are  collected,  it  should  be 
in  position  to  retire  its  commercial  paper.  A  thorough  in- 
vestigation should  be  made  in  the  trade  to  determine  whether 
the  borrower  is  in  the  habit  of  discounting  his  bills.  Of 
course,  such  a  concern  gives  a  list  of  references  which  usually 
embraces  those  houses  with  which  it  is  in  high  credit  stand- 
ing and  from  which  it  makes  a  large  share  of  its  purchases. 
If  the  bank's  credit  man  can  obtain  the  services  of  one  of  the 
interchange  bureaus,  he  can  readily  ascertain  how  the  pros- 
pective borrower  is  in  the  habit  of  handling  its  small  pur- 
chases, which  frequently  make  up  the  great  volume  of  its 
business  transactions.  With  no  such  system,  of  interchange 
at  his  command,  the  bank  credit  man  works  at  a  disadvan- 
tage when  compared  with  the  commercial  credit  man.  He 
must,  therefore,  evolve  some  system  by  which  he  can  obtain 
this  very  essential  trade  information.  Integrity  in  banking 
credits  is  held  to  be  as  important  as,  if  not  more  so  than,  in 
commercial  credits ;  this  should  therefore  be  included  in  the 
investigation. 

A  buyer  of  paper  must  also  consider  the  business  in  which 
the  issuing  concern  is  engaged.  Naturally,  a  concern  which 
handles  or  manufactures  staples  can  convert  its  assets  much 
more  readily  than  the  importer  or  dealer  in  luxuries,  the  sale 
of  which  depends  on  healthy  fundamental  conditions 
throughout  the  country,  or  even  on  the  whims  of  fashion. 

Indorsed  Paper  Desirable 

It  has  been  shown  that  the  bank  has  a  choice  of  paper 
from  all  kinds  of  industries  and  from  various  sections  of  the 
country ;  and  these  facts  coupled  with  a  choice  of  maturities 


78 


CREDIT    OFFICE    ROUTINE 


make  commercial  paper  a  most  desirable  investment.  It  has 
been  shown  that  commercial  paper  is  usually  met  at  matur- 
ity ;  but  should  the  bank  find  itself  in  urgent  need  of  imme- 
diate funds,  such  paper  can  be  resold  on  the  open  market 
before  maturity.  As  a  further  illustration  of  the  desir- 
ability of  commercial  paper,  it  is  a  common  custom  for  the 
officers  of  a  corporation  to  lend  their  personal  indorsement 
to  the  paper  of  the  corporation.  The  credit  man  of  the  bank 
should  choose  such  paper  over  single-name  paper,  because 
of  the  additional  financial  worth  of  the  paper  through  the 
extra  indorsements,  and  because  through  such  indorsements 
the  officers  express  their  faith  in  the  concern.  Their  indorse- 
ments also  serve  to  make  forgeries  more  difficult. 

Commercial  paper  is  frequently  indorsed  by  firms  or  in- 
dividuals other  than  those  immediately  interested  in  the 
maker.  It  might  be  well  to  ascertain  exactly  the  relations 
between  the  maker  and  indorser  to  see  how  close  is  the  com- 
munity of  interest.  Such  indorsement  may  be  added  for 
the  twofold  purpose  of  increasing  security  and  insuring 
moral  support;  but  the  credit  man  should  look  for  real  se- 
curity on  the  part  of  the  maker  itself — and  the  strength  of 
the  indorser  is  just  that  much  to  the  good. 

Mutual  Interests  of  the  Bank  and  Its  Customers 

It  is  the  present  policy  of  credit  men,  to  use  their  influence 
not  only  with  a  view  to  improving  conditions,  but  for  assist- 
ing all  lines  of  legitimate  business.  This  effort  toward  busi- 
ness extension  is  exercised  by  educating  business  men  in 
proper  methods  of  business  management,  so  that  they  may 
attain  to  ultimate  success  by  avoiding  the  pitfalls  which  con- 
stantly beset  the  pathway  of  the  inexperienced.  The  banker 
occupies  a  position  peculiarly  fitted  for  helping  the  various 
industries  represented  in  his  list  of  customers.  He  acquires 
a  wide  and  varied  experience  in  all  lines  of  business  and 


BANK    CREDITS 


79 


gets  in  touch  with  the  most  advanced  ideas  along  business 
lines.  A  banker  ought  not  to  wait  until  the  customer  comes 
to  him  for  advice  and  assistance,  since  the  customer  will 
often  delay  until  it  is  too  late.  So  if  the  credit  department 
of  the  bank  will  keep  in  close  touch  with  the  customers  and 
advise  with  them  whenever  there  is  the  least  sign  of  an  ir- 
regularity in  their  business  affairs,  such  customers  may  be 
guided  away  from  approaching  difficulties. 

The  bank  account  is  a  sure  index  of  the  health  of  a  busi- 
ness, and  the  shrewd  credit  man  is  the  first  to  read  the  signs 
of  impending  disaster.  The  interests  of  bank  and  customer 
are  mutual,  for  the  bank  is  prosperous  when  its  clients  are 
prosperous.  By  careful  and  efficient  management  of  their 
business  these  clients  increase  the  safety  of  their  loans  from 
the  bank;  and  such  management  is  best  brought  about  by 
close  and  personal  contact  with  the  bank  officials,  who  are 
always  glad  to  foster  sound  business  by  extending  friendly 
advice  on  all  important  matters. 


Part  II — Credit  Information  and  Protection 


CHAPTER    VII 

THE   COMMERCIAL   AGENCY 

The  Rise  of  the  Commercial  Agency 

The  most  valuable  source  of  information  for  the  credit 
department  is  the  commercial  agency.  The  chief  agencies — 
The  Bradstreet  Co.,  and  R.  G.  Dun  &  Co. — began  their  work 
in  a  very  limited  way,  but  have  kept  pace  with  the  many 
changes  and  great  development  of  the  commercial  interests 
of  the  country.  During  their  long  career  other  commercial 
agencies  have  arisen  and  passed  away.  Agencies  for  spe- 
cial lines  of  trade  have  also  been  established  and  some  of 
them  have  been  more  or  less  successful ;  but  with  changing 
conditions  and  the  growth  of  the  department  store  idea,  it 
has  been  shown  that  for  the  credit  man  the  work  of  the 
trade  bureau  cannot  be  compared  with  that  of  either  Dun 
or  Bradstreet. 

The  success  of  an  institution  depends  primarily  upon  the 
need  for  its  existence,  and  the  commercial  agency  has  suc- 
ceeded because  it  has  become  a  necessity  in  the  conduct  of 
any  business  which  involves  the  granting  of  credit.  Before 
its  foundation  credit-granting  was  conducted  along  lines 
extremely  primitive.  The  small  merchants  visited  the 
large  trade  centers  to  purchase  their  goods.  They  secured 
credit  on  the  strength  of  their  own  statements  and  the  im- 
pressions which  they  made  on  the  house.  Frequently  the 
merchants  of  New  York  and  Philadelphia  shipped  large 
quantities  of  goods  into  the  wilderness  beyond  the  Alle- 

80 


THE    COMMERCIAL    AGENCY  gj 

gheny  Mountains,  and  it  was  months  before  they  even  heard 
of  their  safe  arrival.  Six  months  frequently  elapsed  before 
they  again  saw  the  merchant  to  whom  they  had  trusted  a 
large  bill  of  merchandise.  Money  in  the  form  of  actual 
currency  was  scarce,  and  the  small  merchant  took  in  ex- 
change for  his  goods,  live  stock,  grain,  and  even  skins  and 
furs,  which  had  to  be  shipped  and  marketed. 

During  the  panic  of  1837,  with  its  accompanying  fail- 
ures among  merchants,  the  wholesale  houses  of  the  East 
realized  that  their  plan  of  sending  house  investigators  or 
reporters  among  the  trade  was  inadequate  and  that  a  more 
efficient  system  must  be  devised.  The  territory  covered  was 
rapidly  increasing  and  the  expense  of  sending  a  man  from 
the  house  to  make  investigations  was  too  great.  At  the 
same  time  the  idea  itself  was  not  practical,  as  one  or  two 
men  could  not  cover  the  territory  with  the  inadequate  means 
of  transportation  of  those  days ;  even  the  postal  service  was 
slow  and  expensive.  From  such  conditions  grew  the  idea 
of  collecting  and  recording  information  on  merchants,  and 
publishing  or  sending  it  out  from  a  central  office,  and  from 
this  has  resulted  the  two  great  commercial  agencies — Dun's 
and  Bradstreet's — and  the  numerous  smaller  agencies  which 
operate  in  special  lines  of  business. 

The  early  work  of  the  agencies  was  crude  and  their  re- 
ports necessarily  incomplete.  In  recent  years,  however, 
there  has  come  about  a  great  change  in  the  method  of  grant- 
ing credit,  and  the  work  of  the  agencies  has  expanded  enor- 
mously. 

One  of  the  chief  reasons  for  the  success  of  the  agency  is 
the  general  confidence  reposed  in  it.  This  confidence  arises 
from  the  absolute  impartiality  of  its  ratings.  The  com- 
mercial agency  stands  alone  in  dealing  with  all  classes  and 
kinds  of  business ;  it  rates  the  small  merchant  as  well  as  the 
large  houses  from  which  the  small  merchant  obtains  his 


82         CREDIT    INFORMATION    AND    PROTECTION 

goods.  The  matter  of  credit  is  of  such  vital  importance 
that  the  agency  itself  must  be  absolutely  inaccessible  to  any 
pressure  that  might  be  brought  to  bear  to  influence  it  in  the 
rating  of  a  concern. 

Agency  Publications 

The  familiar  rating  books  of  the  agencies,  published  each 
quatrter,  cover  the  entire  country  and  are  arranged  alphabet- 
ically by  states,  cities,  and  smaller  corporate  divisions.  The 
names  of  all  the  merchants  rated  in  any  given  city  or  village 
are  also  alphabetically  arranged.  As  a  convenience  for  trav- 
eling men,  the  rate  books  are  also  published  in  state  editions 
of  pocket  size ;  but  such  editions  are  sold  only  to  subscribers 
to  the  larger  rating  books.  Until  recently  the  agencies  pub- 
lished daily  or  weekly  sheets  containing  lists  of  business 
changes,  failures,  new  incorporations,  and  similar  items  of 
news ;  but  for  various  reasons  this  practice  has  been  discon- 
tinued, and  such  changes  first  appear  in  the  quarterly  books. 

The  rating  books  contain  only  the  names  of  those  indi- 
viduals, firms,  or  corporations  which  are  actually  engaged 
in  business.  No  private  persons  are  reported  or  rated.  An 
individual  may  be  worth  millions,  but  unless  he  is  engaged 
in  buying  or  selling  merchandise  or  in  some  business  in- 
volving the  granting  or  obtaining  of  credit  (this  including 
every  form  of  mercantile  transaction),  his  name  will  not 
appear  in  the  rating  books. 

In  addition  to  the  rating  books  the  agencies,  under  con- 
tract, furnish  as  requested,  detailed  reports  on  specific  busi- 
ness concerns.  It  is  really  upon  these  reports  that  the  credit 
man  bases  his  judgment.  They  are  the  fullest,  the  most  ac- 
curate, and  sometimes  the  only  source  of  credit  information 
obtainable.  But  before  dealing  with  the  report  itself,  it 
might  be  well  to  consider  the  organization  and  scope  of  the 
•work  of  the  two  great  agencies. 


THE    COMMERCIAL    AGENCY  83 

The  Agency  Organization 

For  the  purposes  of  the  commercial  agency  the  country 
is  divided  into  districts,  varying  in  size  according  to  popula- 
tion and  volume  of  business.  The  large  trade  centers  are 
subdivided  into  districts  and  each  line  of  trade  is  covered  by 
a  district  reporter  assigned  to  that  particular  line.  These 
reporters  are  high-class,  intelligent  men,  and  are  kept  in  the 
same  district  for  years.  They  are  thus  able  to  get  in  touch 
with  the  inside  workings  of  all  the  large  business  concerns. 
They  report  to  the  district  manager  each  day  all  items 
affecting  the  business  standing  of  the  concerns  to  which  they 
are  assigned,  together  with  the  results  of  their  own  in- 
spection. The  duties  of  the  city  reporter  are  very  much 
like  those  of  the  reporter  for  a  large  daily  paper,  except  that 
his  work  covers  one  particular  line  and  his  information 
must  be  kept  secret. 

The  country  districts  outside  the  large  trade  centers  are 
subdivided  into  smaller  districts,  each  in  charge  of  a  sub- 
office,  with  which  is  connected  a  staff  of  reporters.  If  the 
sub-office  is  of  sufficient  importance,  reports  are  written 
and  files  made  up  covering  the  immediate  territory;  other- 
wise such  reports  are  handled  in  the  district  office,  supposed 
to  cover  a  certain  number  of  counties,  which  may  lie  in 
different  states. 

In  addition  to  the  reporters  who  work  from  the  district 
offices,  the  agency  has  an  attorney  at  every  county  seat  who 
makes  investigations,  reports  failures  and  business  changes, 
and  often  makes  collections.  Important  towns  other  than 
the  county  seat  and  the  neighboring  territory  are  also 
represented  by  attorneys  so  distributed  that  the  business  con- 
dition of  every  village  merchant  and  even  every  crossroads 
country  store  is  covered  by  the  organization  of  the  com- 
mercial agency.  The  system  is  complete  and  effective  in 
operation. 


84         CREDIT    INFORMATION    AND    PROTECTION 

The  District  Reporter 

The  official  in  charge  of  the  district  office  assigns  each 
reporter  to  certain  counties  in  the  district.  When  the  re- 
porter starts  in  to  revise  a  certain  county,  he  carries  with 
him  a  printed  fonn  for  each  business  concern,  similar  to  the 
inspection  slips  of  an  insurance  inspector.  This  form  con- 
tains questions  covering  every  feature  of  the  business.  Hav- 
ing a  list  of  all  business  concerns  in  the  county,  the  work  of 
the  reporter  is  clearly  defined  and  he  knows  each  day  just 
what  he  is  expected  to  accomplish.  There  was  formerly 
more  or  less  reluctance  on  the  part  of  merchants  to  make  a 
statement  to  the  agencies,  but  this  feeling  has  now  disap- 
peared owing  to  the  education  of  the  small  merchant  by  the 
credit  men  of  the  country,  as  well  as  by  the  agency  itself. 
Even  the  smallest  merchants  are  beginning  to  realize  how 
important  it  is  to  make  some  kind  of  financial  showing  to 
the  agencies,  so  that  their  business  may  be  accurately  re- 
ported and  a  just  rating  assigned. 

The  reporter  in  his  interview  with  the  proprietor,  goes 
carefully  over  the  inspection  slip,  obtaining  an  answer  to 
each  question ;  and  whenever  possible  he  also  obtains  a  com- 
plete statement  of  assets  and  liabilities,  together  with  the 
names  of  the  largest  creditors,  references,  and  the  name  of 
the  bank  where  deposits  are  made.  The  detailed  statement 
is  verified  by  consultation  with  banks  and  attorneys  and 
from  the  county  records.  The  reporter  makes  his  own 
observations  as  to  the  merchant's  business,  how  it  is  run, 
the  condition  of  the  stock,  and  the  general  policy  and  char- 
acter. He  also  gathers  any  important  items  as  to  the 
character,  social  standing,  habits,  and  morals  of  the  mer- 
chant. He  practically  lives  in  his  work,  and  must  be  alert 
and  keen  at  every  moment  to  gather  every  scrap  of  informa- 
tion that  has  a  bearing  on  the  moral  or  financial  condition 
of  the  concern  under  investigation. 


THE    COMMERCIAL    AGENCY  85 

In  addition  to  the  above  work  of  the  reporter,  he  must 
also  consider  the  annual  statement  of  the  merchant.  It  is 
the  custom  for  a  business  concern  to  take  an  inventory  at 
least  once  a  year,  but  the  time  of  year  in  which  it  is  taken 
and  the  books  closed  varies  with  the  line  of  business.  A 
grocery  house  might  take  stock  on  July  i,  and  a  wholesale 
clothing  house,  after  its  fall  shipments  are  made  and  before 
the  spring  stock  begins  to  arrive.  Other  lines  may  choose 
January  i ;  but  the  commercial  agency  is  expected  to  keep 
in  close  touch  with  all  lines  of  business  and  furnish  the  latest 
statement  as  soon  as  the  books  for  that  concern  are  closed. 
The  statement  of  the  small  merchant  who  never  takes  stock 
is  largely  guesswork,  but  the  reporter  takes  the  figures  and 
endeavors  to  verify  or  correct  them. 

Agency  Information 

It  will  be  seen  that  the  gathering  of  the  above  informa- 
tion by  the  reporter  involves  an  infinite  amount  of  persever- 
ance, and  considerable  expense.  The  material  is  condensed 
into  an  abstract  at  the  district  ofiice.  Frequently  there  are 
matters  that  demand  further  investigation  through  corre- 
spondence between  the  office  and  the  subject  of  the  report, 
or  with  other  authorities. 

In  addition  to  the  report  containing  the  annual  state- 
ment, the  agency  revises  or  attempts  to  revise  all  its  state- 
ments at  periods  of  six  months.  It  is  a  great  annoyance  to 
the  credit  man  to  receive  a  report  which  is  largely  a  matter 
of  surmise,  containing  merely  an  approximate  statement  or 
none  at  all;  but  it  must  be  remembered  that  reporters  are 
human  and  cannot  accomplish  the  impossible.  If  a  mer- 
chant persistently  refuses  to  make  a  statement,  the  agency 
can  only  record  this  fact  and  make  its  own  estimate.  There 
is  considerable  criticism  of  the  agency,  at  times,  because  it 
furnishes  some  kind  of  report  upon  every  request ;  the  report 


86         CREDIT    INFORMATION    AND    PROTECTION 

itself  may  be  valueless,  but  the  agency  furnishes  it  and 
charges  for  the  service.  If  the  credit  man  would  only  stop' 
to  think  that  considerable  time,  effort,  and  expense  have 
already  been  spent  to  gain  this  information,  he  would  be 
willing  to  pay  at  regular  rates  for  what  little  he  does  get 
and  realize  that  it  is  the  best  and  often  the  only  information 
which  the  agency  can  obtain. 

For  the  sake  of  efficiency  and  the  making  of  complete 
reports,  the  work  in  all  lines  must  be  kept  strictly  up  to  the 
minute  in  the  district  offices.  If  a  new  business  is  organized 
at  some  out-of-the-way  station,  a  report  must  be  written  and 
placed  on  file,  not  only  in  the  home  office,  but  also  in  the 
other  district  offices,  if  the  new  concern  is  likely  to  buy  in 
other  markets.  All  changes  of  any  nature  must  be  recorded, 
not  alone  for  the  use  of  subscribers,  but  for  the  head  office 
to  note  in  the  rating  books.  For  the  entire  country  these 
changes  run  into  thousands  each  day.  Any  that  are  im- 
portant and  affect  other  districts  are  telegraphed  by  a  special 
code  which  insures  secrecy. 

No  attempt  will  be  made  to  describe  the  commercial  re- 
port in  detail,  as  it  is  familiar  to  every  credit  man.  As  to 
the  attitude  of  the  credit  man  toward  the  ratings,  it  may  be 
observed  that  the  capital  rating  does  not  necessarily  mean 
the  actual  net  worth  of  the  individual,  but  is  based  primarily 
on  his  statement  and  the  deductions  and  confidential  in- 
formation of  the  reporter.  Due  allowance  is  usually  made 
for  shrinkages,  exemptions,  etc.  The  report  is  merely  a 
basis  for  an  estimate,  and  while  the  agency  does  not  guar- 
antee the  information,  it  is  nevertheless  correct  in  a  very 
great  majority  of  cases.  The  absence  of  a  rating  does  not 
mean  that  the  subject  is  devoid  of  financial  worth,  but  that 
the  agency  has  not  been  able  to  procure  information  suffi- 
ciently satisfactory  to  justify  it  in  assigning  a  rating  to 
the  concern. 


THE    COMMERCIAL    AGENCY  g/ 

Agency  Contracts 

•Contracts  with  the  commercial  agencies  are  made  an- 
nually, and  include,  besides  the  rating  books,  a  certain  num- 
ber of  reports  dependent  upon  the  requirements  of  the  sub- 
scriber. The  price  of  the  report  decreases  proportionately 
as  the  number  increases. 

In  a  new  business  it  is  necessary  that  a  credit  file  be 
opened  for  each  customer  put  on  the  books,  and  the  same  is 
equally  important  in  an  old-established  business.  These 
new  accounts  should  be  listed  with  the  commercial  agencies, 
whether  reports  have  been  ordered  or  not.  The  reason  for 
this  is  that  the  agency  makes  a  record  on  its  files  that  the 
credit  man  is  interested  in  the  particular  accounts.  Thus 
the  agency  is  enabled  to  get  information  regarding  the 
customer  from  the  jobber  who  has  listed  the  account,  and 
also  to  gather  material  for  use  in  short  reports  to  the  jobber 
indicating  fires,  mortgages,  deaths,  failure,  or  other  items 
affecting  credit  standing.  This  special  information  in  nearly 
every  case  is  most  valuable  and  this  voluntary  reporting  by 
the  agencies  is  one  of  the  best  features  of  their  contracts. 

Many  leading  credit  men  decline  to  furnish  a  "customers' 
list"  to  the  agencies,  maintaining  that  it  is  too  much  trouble 
to  answer  the  inquiries  when  they  come  in.  They  argue  that 
the  agencies  charge  for  every  report  they  serve  but  do  not 
pay  the  subscriber  for  voluntary  information.  This  is  a 
short-sighted  policy  on  the  part  of  the  credit  men,  for  if 
information  is  furnished  a  commercial  agency  regarding 
customers,  the  agency  service  is  thus  enhanced.  Further- 
more, the  local  manager  of  that  agency  can  and  will  repay 
such  courtesy  in  many  ways  by  advice  and  assistance  for 
which  he  cannot  charge  under  his  contract.  By  all  means 
a  friendly  spirit  of  co-operation  with  the  agency  should  be 
cultivated  by  the  credit  man. 


CHAPTER    VIII 

THE     NATIONAL     ASSOCIATION     OF     CREDIT 

MEN 

Purpose  of  the  Association 

It  is  difficult  to  write  of  the  National  Association  of 
Credit  Men  and  its  work  without  seeming  to  boast,  not  only 
of  the  rapid  increase  in  its  membership,  but  also  of  the  high 
class  of  individuals  composing  the  membership.  Organized 
in  1896,  and  having  a  membership  of  over  nineteen  thousand 
in  191 5,  it  may  reasonably  be  argued  that  the  Association 
was  the  outgrowth  of  an  urgent  need.  Any  institution  hav- 
ing such  origin  will,  in  the  course  of  time,  fulfil  the  purpose 
for  which  it  was  designed.  Its  success  is  assured  to  the 
extent  that  it  conforms  to  its  ideals  and  hews  its  course  to 
the  line  of  its  original  plans. 

"To  promote  such  business  principles  that  commerce  can 
and  must  be  conducted  on  honorable  and  equitable  lines," 
is  the  attainment  toward  which  the  Association  has  striven. 
Acting  on  this  basic  principle  it  has  become  a  great  national 
institution  for  the  scientific  study  of  credit  and  the  applica- 
tion of  scientific  principles  to  the  every-day  work  of  the 
credit  man.  It  has  accomplished  more  than  this.  Realiz- 
ing the  importance  of  the  credit  department  and  its  rela- 
tions to  the  other  departments  of  the  business  structure, 
it  has  brought  about  an  evolution  from  the  old-fashioned, 
selfish,  and  narrow-minded  methods  of  a  close-fisted,  secre- 
tive policy,  to  a  broad  and  liberal  scheme  of  business  life. 

Origin  and  Ideals 

After  the  great  panic  of  1893,  with  its  long  record  of 
commercial  mortality,  a  few  thinking  credit  men  began  to 

SS 


NATIONAL    ASSOCIATION    OF    CREDIT    MeN        89 

realize  that  too  little  importance  had  been  placed  on  the 
dispensation  of  credit.  The  idea  that  "credit  is  cheap"  had 
taken  a  firm  hold  on  the  community  at  large.  Credit  men 
were  working  in  the  dark  along  antiquated  lines;  and  al- 
though a  few  exceptionally  bright  men  were  meeting  with 
success  here  and  there,  concerted  action  and  systematic 
ledger  interchange  of  credit  information  on  customers  were 
undeveloped  ideas. 

While  realizing  that  credit  conditions  were  in  need  of 
radical  changes,  these  men  knew  that  such  changes  could 
be  brought  about  only  by  united  action ;  that  only  through 
intelligent  organized  effort  could  needful,  practical  legisla- 
tion be  secured;  that  only  through  eternal  vigilance  could 
good  laws  be  kept  from  becoming  dead  letters  and  weak 
laws  from  serving  as  mere  subterfuges.  The  average  Amer- 
ican takes  pride  in  upholding  and  upbuilding  the  community 
in  which  he  lives.  This  idea  of  civic  pride  is  apparent, 
also,  in  the  tendency  of  business  men  to  get  together  in 
commercial  clubs,  trade  associations,  boards  of  trade,  or 
similar  organizations  having  for  their  purpose  the  exten- 
sion of  trade  or  business.  Therefore,  in  the  natural  order 
of  things,  the  National  Association  of  Credit  Men  was 
born.  There  was  a  place  for  it  in  the  great  scheme  of  busi- 
ness affairs.  Its  ideals  were  the  principles  of  integrity;  and, 
as  a  natural  consequence,  it  has  taken  its  place  as  a  great 
and  national  force  in  bringing  about  higher  methods  in  the 
world  of  business.  Business  men  have  always  worked  more 
or  less  in  co-operation;  but,  since  the  organization  of  the 
National  Association,  credit  men  have  recognized  a  truth 
that  is  now  generally  regarded  as  fundamental — that  each 
may  persevere  in  his  own  business,  and  may  compete  fairly, 
honorably,  and  successfully  with  others  in  the  same  line  of 
business,  without  keeping  to  himself  as  a  trade  secret,  all 
that  he  knows,  for  his  own  personal  advantage.    If  the  As- 


go         CREDIT    INFORMATION    AND    PROTECTION 

sociation  has  done  nothing  more  than  bring  credit  men 
closer  together,  not  merely  socially  or  formally,  but  in  the 
intimate  relationship  which  now  exists,  resulting  in  the  in- 
terchange of  experiences  and  sound  ideas,  it  has  done  well 
and  the  purpose  of  its  founders  may  be  said  to  have  been 
accomplished. 

Practical  Work  of  the  Association 

Representing,  as  it  does,  the  brightest  minds  of  the  credit 
interests  of  the  country,  the  Association  has  not  stopped 
m.erely  with  bringing  men  together;  in  fact,  this  only 
paved  the  way  for  the  real  work.  The  idea  of  personal  re- 
sponsibility was  strongly  emphasized  at  the  outset;  respon- 
sibility not  only  for  doing  good  work  in  one's  own  business, 
but  also  for  inculcating  high  ethical  business  standards. 
When  every  man  realized  that  upon  him  rested  a  respon- 
sibility for  building  up  a  sound  social  condition  by  trans- 
acting his  business  in  accordance  with  the  highest  stan- 
dards, the  public  was  quick  to  notice  a  change  in  business 
methods.  These  men  have  helped  not  only  themselves; 
their  influence  has  reacted  through  the  business  interests  of 
the  country,  so  that  the  same  high  principles  which  they 
adopted  have  worked  to  improve  not  only  credit  conditions 
but  general  business  conditions  as  well.  It  is  not  out  of 
place  here  to  quote  from  the  Bulletin,  the  official  organ  of 
the  Association : 

"The  Bulletin  of  the  National  Association  has  in  many 
previous  issues  contended  that  the  degree  of  progress  of 
any  city  as  a  trade  center  depends  to  a  large  extent  upon 
its  credit  men — ^that  they  be  alert,  men  of  big  caliber,  whose 
grasp  on  ideas  and  interests  is  not  limited  to  the  narrow, 
every-day  routine  of  their  own  particular  business.  Big 
credit  men  mean  big  progress  for  the  locality  in  which  they 
are  exercising  their  big  powers." 


NATIONAL    ASSOCIATION    OF    CREDIT    MEN        gj 

Working  Committees 

To  appreciate  the  various  classes  of  work  in  which  the 
Association  is  engaged  in  furtherance  of  these  ideas,  one  has 
but  to  read  the  following  list  of  the  standing  committees : 

1.  The  Legislative  Committee,  which  has  for  its  object 
the  promotion  of  legislation  beneficial  to  business,  partic- 
ularly the  credit  branch ;  also  for  discouraging  bad  legisla- 
tion, state  as  well  as  national,  especially  as  it  affects  the 
National  Bankruptcy  Act. 

2.  The  Membership  Committee,  for  carrying  on  the 
work  for  the  extension  of  the  Association  among  the  most 
reputable  wholesale  houses  and  other  concerns  which  are 
interested  in  the  granting  of  credit. 

3.  The  Committee  on  Bankruptcy  Law,  which  has  charge 
of  all  matters  pertaining  to  bankruptcy. 

4.  The  Adjustment  Bureau,  for  formulating  and  carry- 
ing out  plans  for  the  establishment  of  bureaus  for  adjust- 
ing the  affairs  of  debtors. 

5.  The  Committee  on  Credit  Department  Methods, 
which  deals  with  such  work  as  the  name  implies. 

6.  The  Mercantile  Agency  Committee,  for  co-operating 
with  the  commercial  agencies  with  a  view  to  improving 
the  service. 

7.  The  Credit  Co-operation  Committee,  for  furthering 
the  work  among  members  and  the  affiliated  branches. 

8.  The  Investigation  and  Prosecution  Committee,  which 
is  one  of  the  most  important  of  all  the  committees,  and  has 
done  much  to  bring  about  a  regard  for  the  law  among  dis- 
honest debtors. 

9.  The  Fire  Insurance  Committee,  which  consults  on  all 
matters  relating  to  this  class  of  insurance,  and  aims  espe- 
cially to  awaken  public  sentiment  against  preventable  fire 
waste. 


9^ 


Credit  iNFoRMAtioN  and  protection 


10.  The  Committee  on  Business  Literature,  for  carrying 
on  educational  work  by  disseminating  helpful  literature  on 
credit  subjects  among  credit  men. 

11.  The  Banking  and  Currency  Committee,  for  promot- 
ing reforms  in  the  currency  system  of  the  country,  as  well 
as  along  other  similar  lines. 

It  will  be  seen  from  the  above  that,  while  a  wide  range 
of  subjects  is  covered,  they  are  all  closely  related  to  the 
fundamental  subject  of  credit-granting.  A  brief  generaliza- 
tion of  the  purposes  of  the  several  committees  might  be 
thus  formulated: 

(a)  Better  protection  of  credits. 

(b)  Protection  of  creditors. 

(c)  Reduction  of  losses  through  bad  debts. 

(d)  Prosecution  and  punishment  of  fraud. 

(e)  Reformation  of  collection  laws. 

(f)  Improvement  of  the  present  system  of  collections. 

(g)  Improvement  of  the  methods  of  handling  bank- 

rupt estates, 
(h)   Improvement  of  the  commercial  reporting  system. 

The  credit  man  is  the  one  individual  in  the  business  estab- 
lishment who  has  personal  intercourse,  both  actual  and 
by  correspondence,  with  more  people  than  anyone  else ;  and 
it  is  to  him  that  the  customers  naturally  turn  for  advice  and 
counsel. 

On  the  subject  of  the  credit  man  a  member  of  the  As- 
sociation writes  in  the  Bulletin :  "He  must  be  thoroughly 
informed  on  general  matters  of  business.  I  am  convinced, 
therefore,  that  the  credit  man  is  the  logical  teacher  of  those 
fundamental  principles  which  go  to  make  up  the  right  sort 
of  merchant,  whether  creditor  or  debtor;  and  that  he  must 
be  both  ethical  and  practical." 

In  this  short  space  it  would  be  impossible  to  enumerate 


NATIONAL    ASSOCIATION    OF    CREDIT    MEN 


93 


the  many  benefits  that  members  of  the  Credit  Association 
obtain  from  each  other  and  from  the  head  office.  It  would 
be  equally  difficult  to  enumerate  the  many  beneficial  results 
that  have  accrued  from  the  work  of  the  Association  as  a 
whole. 

Benefits  of  the  Association 

One  of  the  greatest  benefits  derived  from  an  organization 
of  this  character  is  the  opportunity  for  its  members  to  ex- 
change ideas.  In  the  local  organizations  meetings  are  fre- 
quently held  at  the  noon  hour  or  in  the  evening,  and  the 
members  gather  at  lunch  or  at  dinner  to  discuss  "hard"  ac- 
counts of  mutual  interest,  as  well  as  other  problems  that  con- 
front the  credit  man.  A  regular  business  programme  is 
followed,  and  usually  an  address  on  some  important  credit 
topic  is  delivered  to  close  the  short  session. 

It  is  told  that  in  a  certain  trade  center  there  was  bitter 
rivalry  among  the  jobbers,  many  of  whom  were  not  even 
on  speaking  terms ;  and  that  this  ugly  spirit  extended  to  the 
various  credit  departments,  which  were  not  in  the  habit  of 
exchanging  information  and  never  lost  the  opportunity  to 
take  advantage  of  one  another.  A  member  of  the  National 
Association  visited  the  town  and  looked  over  the  situation. 
As  a  result  a  local  branch  was  formed.  In  two  years  the 
credit  men  of  practically  every  jobbing  house  in  the  city 
were  members.  All  differences  had  been  overlooked.  The 
ethics  of  credit  interchange  were  not  only  scrupulously  re- 
garded, but  were  so  extended  that  such  interchange  was 
considered  a  pleasure  by  both  the  inquirer  and  the  in- 
formant, and  the  Association  has  grown  to  be  one  of  the 
strongest  local  branches  in  the  entire  organization.  Fur- 
thermore, the  heads  of  the  houses  imbibed  the  same  spirit, 
and  took  up  the  idea  of  "getting  together"  on  such  points 
regarding  trade  as  did  not  come  under  the  province  of  the 


94 


CREDIT    INFORMATION    AND    PROTECTION 


credit  office.  This  is  but  one  illustration  of  how  the  As- 
sociation spirit  has  taken  hold  throughout  the  country. 

Trade  abuses,  cancellations,  excessive  and  unwarranted 
discounts,  and  all  manner  of  unbusiness-like  practices  on  the 
part  of  customers  are  considered  by  the  Association,  and 
efforts  to  correct  such  evils  are  usually  successful.  In  fact, 
one  has  only  to  read  a  copy  of  the  Bulletin  to  gather  some 
idea  of  the  important  work  that  is  being  accomplished. 

"The  Association's  task  is  a  great  one.  Its  work  is  to 
fight  for  truth  among  men,  to  strengthen  confidence  in  the 
spoken  and  written  word,  to  make  men  realize  the  absolute 
necessity  of  fidelity  to  their  promises.  Further,  it  must 
strive  to  simplify  safe  credit-granting;  to  rid  the  country  of 
whatever  acts  as  an  obstacle  to  the  exchange  of  commod- 
ities among  men  in  whatever  part  of  the  land  they  may 
reside;  and  to  make  men  see  that  so  long  as  they  depend 
in  any  sense  on  credit  they  are  trustees  in  their  relation  to 
their  creditors,  and  must  be  not  only  honest  trustees  but 
careful  trustees,  using  every  means  in  their  power  to  dis- 
charge their  obligations  in  due  form.  With  this  spirit 
developed  in  the  individual — the  spirit  of  pride  in  one's 
credit  standing — there  is  developed  a  nation  of  men  of  whom 
it  may  be  said  that  their  word  is  as  good  as  their  bond.  No 
higher  thing  can  be  asked  or  striven  for !" 


CHAPTER    IX 

INTERCHANGE   OF   LEDGER    EXPERIENCE 

The  Interchange  or  Trade  Bureau 

One  of  the  oldest  methods  of  securing  information  that 
will  decide  the  extension  of  credit,  is  by  consulting  the  cus- 
tomer's references  and  obtaining  their  individual  expres- 
sions of  opinion.  Although  the  idea  of  combining  these 
opinions  in  a  condensed  report  and  establishing  intercom- 
munication among  such  references  has  been  in  operation 
for  about  twenty  years,  its  greatest  development  has  come 
about  quite  recently. 

In  this  direction  an  effort  has  been  made  by  trade  as- 
sociations to  establish  interchange  bureaus,  or  trade  bureaus. 
For  instance,  the  Boot  and  Shoe  Association,  or  the  Asso- 
ciation of  Furniture  Manufacturers,  may  combine  in  its 
central  office  the  ledger  experiences  of  all  its  members,  and 
serve  a  copy  of  its  report  to  interested  subscribers.  This 
is  good  as  far  as  it  goes,  but  the  changing  conditions  of 
business  in  late  years  have  made  such  reports  fall  far  short 
of  the  purpose  for  which  they  were  intended. 

In  considering  the  work  of  such  an  association  trade 
bureau,  let  it  be  assumed,  for  instance,  that  a  shoe  factory 
wishes  a  clearance  on  a  shoe  store  in  a  good-sized  city  in 
the  Middle  West.  The  central  office  places  the  name  of 
the  store  on  its  clearance  sheet.  When  the  report  is  com- 
piled it  contains  satisfactory  comments  from  five  factories 
which  are  selling  in  liberal  amounts,  and  several  comments 
in  a  smaller  way  which  are  not  quite  so  favorable.  It  is 
reasonable  to  suppose  that  the  experience  of  the  larger 
creditors  would  govern,  or  at  least  influence  the  credit  man 

95 


gS         CREDIT    INFORMATION    AND    PROTECTION 

in  his  decision;  but  upon  reference  to  the  reports  of  the 
commercial  agencies  it  develops  that  the  shoe  store  is  merely 
a  department  in  a  large  general  store  engaged  in  selling  all 
lines  of  merchandise.  The  shoe  department  being  only  one 
of  many  lines  in  which  the  one  concern  is  engaged,  the  trade 
bureau  information  falls  far  short  of  exhibiting  the  liabil- 
ities of  the  customer.  On  the  contrary,  it  may  be  actually 
misleading,  as  it  merely  shows  how  he  is  paying  a  few 
favored  accounts.  It  is  presumed  that  these  are  favored 
accounts  because  the  merchant  is  buying  from  factories  with 
established  and  much-advertised  lines,  making  it  necessary 
for  him  to  keep  such  bills  paid  with  reasonable  promptness 
in  order  to  procure  further  accommodation.  Now,  the  shoe 
jobber  who  has  an  order  for  a  large  bill  of  rubbers  and 
overshoes  from  this  merchant  might  well  pause  before 
checking  through  the  order,  because  he  has  no  knowledge 
of  how  the  merchant  is  paying  the  creditors  on  whom  he 
is  not  absolutely  dependent. 

Again,  the  manufacturer  wants  his  trade  information 
before  cutting  the  stock  to  make  up  the  merchant's  order 
for  fall  shipment.  He  is  working  on  orders  taken  from 
February  to  May,  and  makes  his  clearances  during  the 
spring  months,  while  the  reports  on  ledger  experiences 
probably  deal  with  outstanding  accounts  for  spring  goods, 
many  of  which  are  not  yet  past  due.  The  jobber  wants 
to  ship  his  rubbers  in  the  fall  and  he  must  make  a  new  clear- 
ance in  order  to  procure  information  to  suit  his  needs;  he 
finds  that  the  factory  bills  are  not  yet  due,  and  he  has  no 
idea  how  the  merchant  will  be  situated  when  it  comes  time 
to  pay  them.  His  information  is  so  one-sided  and  incom- 
plete that  it  is  of  no  practical  use  to  him. 

As  another  example,  a  furniture  manufacturer  clears 
through  his  association  a  man  rated  as  a  furniture  dealer, 
and  gets  information  telling  how  the  furniture  bills  are  paid. 


INTERCHANGE    OF    LEDGER    EXPERIENCE 


97 


Of  late,  however,  furniture  stores  are  broadening  out  and 
carrying  bedding,  blankets,  curtains,  and  other  special  lines 
that  are  handled  by  the  dry-goods  trade,  as  well  as  lines  of 
goods  which  are  sold  by  hardware,  musical  instrument,  and 
even  wholesale  jewelry  houses.  Here,  as  in  the  case  of  the 
shoe  store,  information  is  lacking  regarding  the  dealer's 
standing  with  his  creditors  in  the  other  lines  of  goods  which 
he  carries. 

These  two  illustrations  will  show  how  inefficient  the 
trade  bureaus  may  be  when  it  comes  to  checking  up  the 
liabilities  of  a  customer.  The  furniture  dealer  may  pay 
very  promptly  his  bills  for  cutlery  and  household  plated  sil- 
verware because  he  can  take  advantage  of  a  liberal  discount ; 
but  in  order  to  do  this,  he  will  be  forced  to  run  his  blanket 
bills  long  past  maturity  and  thus  reduce  his  credit  standing 
with  the  dry-goods  houses  or  the  blanket  mills.  The  in- 
formation afforded  by  such  trade  bureaus  may,  for  obvious 
reasons,  be  compared  with  the  references  given  by  the  cus- 
tomer himself. 

The  local  interchange  bureaus  among  jobbers  who  sell 
in  a  restricted  territory,  give  better  service  to  the  local  credit 
man,  as  their  membership  usually  includes  jobbers  in  all 
lines.  The  disadvantage  of  such  bureaus  lies  in  the  fact 
that  even  the  smallest  merchant  does  not  confine  all  his  pur- 
chases to  one  market,  and  hence  the  local  bureau  cannot  fur- 
nish his  complete  record. 

Interchange  of  Ledger  Experience 

The  interchange  of  ledger  experiences  will  be  found  in 
the  end  to  be  the  most  helpful  and  important  source  of  in- 
formation for  the  credit  man.  The  commercial  agencies 
set  forth  the  customer's  ability,  integrity,  and  capital;  but 
the  ledger  interchange  shows  just  how  he  makes  use  of 
these  factors.     A  merchant's  credit  standing,  after  all,  is 


98         CREDIT    INFORMATION    AND    PROTECTION 

determined  by  the  manner  in  which  he  makes  use  of  the 
confidence  which  the  credit  man  places  in  him.  He  may 
pay  his  bills  promptly;  but  if  he  makes  unjust  complaints, 
takes  excessive  discount,  makes  arbitrary  deductions  to 
which  he  is  not  entitled,  or  returns  goods  unjustly,  he  should 
not  receive  a  high  credit  rating.  He  may  be  honest  within 
the  law,  but  he  violates  the  principles  of  integrity  by  taking 
an  unfair  advantage  of  his  position. 

While  trade  information  based  on  ledger  experiences  is 
of  such  vital  importance,  there  are  few  credit  men  who  feel 
it  incumbent  on  them  to  give  this  confidential  information 
to  a  stranger.  They  do  not  know  what  use  will  be  made  of 
it ;  nor  can  they  be  assured  that  this  stranger  will  reciprocate 
the  courtesy.  There  must  be  some  definite  assurance  of  an 
observance  of  the  ethics  of  reciprocity. 

It  is  the  experience  of  every  credit  man  that  a  debtor  for 
obvious  reasons  shows  preferences  in  settling  his  bills. 
That  he  is  running  a  fairly  satisfactory  account  in  a  small 
way  and  paying  his  bills  promptly  may  be  due  to  the  fact 
that  the  house  is  a  good  collector  and  keeps  right  after  him. 
After  he  has  become  a  steady  customer  and  more  reliance 
is  placed  on  the  account,  the  collection  department  may  be- 
come more  liberal,  preferring  to  devote  most  of  its  time  to 
accounts  which  demand  constant  attention.  The  steady 
customer  is  allowed  to  run  up  his  bills  and  overlap  in  his 
payments,  until  the  credit  man  is  made  suddenly  aware  that 
he  has  been  sleeping  over  this  account.  An  interchange  of 
ledger  experiences  during  this  period  of  time  might  have 
acquainted  him  with  the  fact  that  his  debtor  was  becoming 
slow  with  other  creditors,  or  even  becoming  involved  beyond 
the  period  of  safety.  If  he  had  awakened  to  these  facts  in 
time,  he  might  have  gotten  out  from  under  the  load.  There 
is,  therefore,  need  for  a  system  which  will  bring  about  this 
interchange  of  experience  in  an  automatic  manner;  that  is. 


INTERCHANGE    OF    LEDGER    EXPERIENCE  gg 

without  the  credit  man's  having  to  single  out  an  account 
every  time  he  desires  a  revision  of  ledger  facts. 

Also  the  impossibility  of  collecting  such  information  by 
actual  correspondence  is  manifest.  Suppose  a  credit  man 
receives  an  order  from  a  new  customer,  and  knows  the  names 
of  fifty  houses  selling  that  customer.  If  he  should  attempt 
to  procure  the  ledger  experiences  from  the  whole  fifty,  the 
actual  cost  in  time  and  postage,  especially  on  a  small  order, 
would  be  too  great.  If  he  should  make  from  ten  to  twenty 
such  investigations  each  day  the  cost  of  running  the  credit 
department  would  assume  alarming  proportions,  not  to 
speak  of  the  possibility  of  all  the  fifty  interested  creditors 
undertaking  to  procure  such  information  at  the  same  time. 
The  credit  departments  of  all  would  have  to  share  the  bur- 
den, for  the  ethics  of  reciprocity  must  be  observed.  Some 
better  way  of  interchanging  ledger  experiences  is  obviously 
desirable. 

The  Credit  Clearing  House 

As  a  result  of  the  problems  involved  in  ledger  inter- 
change, the  Credit  Clearing  House  has  entered  into  the  work 
of  the  credit  department.  Just  as  the  great  commercial 
agencies  of  Dun  and  Bradstreet  have  become  fixtures  in 
their  line  and  powers  in  the  business  world  because  they  have 
met  a  need,  so  has  the  institution  known  as  the  Credit  Clear- 
ing House  become  a  recognized  feature  of  credit  work  be- 
cause it  fills  a  distinct  need  in  the  field  of  ledger  interchange. 
Its  attitude  has  practically  ceased  to  be  that  of  a  private 
corporation  operated  for  gain,  and  has  evolved  into  a  public 
service  institution.  Early  in  its  career  it  realized  that  its 
existence  depended  on  prompt,  efficient  and  faithful  service 
to  its  subscribers,  and  that  it  could  not  furnish  merely  a 
service  measured  in  dollars  and  cents.  This  broad-minded 
liberality  has  been  met  with  the  same  spirit  by  the  credit 


lOO       CREDIT    INFORMATION    AND    PROTECTION 

men;  and  by  working  together  with  the  credit  men  the 
Credit  Clearing  House  has  grown  into  a  national  institu- 
tion. 

The  gathering  of  reports  on  ledger  experiences  into  a 
central  office  for  the  advantage  of  its  members  is  the  whole 
idea  of  the  Credit  Clearing  House.  The  fact  that  it  solicits 
its  contracts  from  all  classes  of  merchants  and  manufac- 
turers, and  from  every  line  of  trade,  both  local  and  national, 
gives  it  an  advantage  over  the  trade  bureaus,  which  work 
in  a  restricted  field.  From  the  miscellaneous  character  of 
its  subscribers  it  must  not  be  thought  that  it  does  not  dis- 
criminate in  its  selection  of  customers.  The  ledger  in- 
formation disclosed  is  a  matter  of  secrecy  and  confidence. 
Also,  absolute  honesty  and  fairness  must  exist  among  the 
subscribers,  not  only  in  their  relations  to  the  Credit  Clear- 
ing House  itself,  but  with  each  other.  The  bond  of  mutual 
interest  must  be  carefully  guarded  as  well  as  defined;  and 
the  ethics  of  confidential  interchange  must  be  zealously  ob- 
served, or  else  the  system  itself  would  be  valueless. 

Clearing  House  Methods — the  District  Office 

In  order  that  the  system  may  be  made  thoroughly  intel- 
ligible to  those  who  are  not  subscribers,  it  is  proper  to  de- 
scribe briefly  the  general  method  of  the  Credit  Clearing 
House. 

A  district  office  located  at  each  trade  center  is  placed 
under  the  supervision  of  a  manager  who  is  responsible  to 
the  officials  operating  from  the  executive  office.  Ledger 
experiences  from  all  the  subscribers  in  this  particular  dis- 
trict are  gathered  into  the  district  office,  and  all  communica- 
tions with  other  district  offices  are  handled  through  these 
offices  and  not  with  subscribers  direct.  Subscribers  do  not 
come  into  contact  with  outside  districts  or  even  with  eacli 
other,  except  through  their  district  offices.     In  this  way  the 


INTERCHANGE    OF    LEDGER    EXPERIENCE        iqi 

vast  amount  of  detail  work  in  handling  credit  interchange 
is  reduced  to  a  minimum. 

Compiling  a  Local  Report 

Should  a  subscriber  desire  a  clearance  on  Henry  Jones, 
of  Willow  Creek,  he  fills  out  his  inquiry  ticket  and  states  the 
nature  of  his  transaction  with  Jones.  The  subscriber  must 
have  a  bona  fide  order  of  specified  amount,  which  must  be 
indicated  either  as  a  "first  order"  or  as  a  credit  for  revision. 
If  the  latter,  the  subscriber  must  have  had  previous  dealings 
with  Jones  and  must  fill  out  his  ticket  giving  such  experience 
in  detail,  so  as  to  carry  out  the  idea  of  mutual  assistance.  A 
subscriber  cannot  make  an  inquiry  simply  as  an  exploration 
tour  into  the  ledgers  of  a  competitor,  with  a  view  to  hunting 
up  a  line  of  good  customers  for  his  own  sales  department. 
As  soon  as  a  house  becomes  a  subscriber  it  files  with  the  dis- 
trict manager  of  the  Clearing  House  a  complete  list  of  all 
its  customers,  whether  their  accounts  are  active  or  not ;  and 
whenever  a  new  account  is  opened,  the  name  and  address 
of  the  customer  are  sent  to  the  district  office  to  be  added 
to  the  subscriber's  list. 

When  the  inquiry  on  Henry  Jones  is  received,  the  man- 
ager looks  to  see  if  Jones'  name  is  on  the  subscribers'  lists. 
This  work  is  facilitated  by  having  a  special  file  for  every 
name  that  has  ever  been  furnished  to  the  ofBce  of  its  sub- 
scribers. If  Jones  has  been  reported  by  four  subscribers, 
their  confidential  numbers  show  on  the  "Jones"  file.  The 
city  in  which  the  district  ofifice  is  located  is  divided  into  two 
or  more  districts,  and  at  a  certain  hour  each  morning  a  dis- 
trict messenger  calls  upon  the  subscribers  to  whom  he  is  as- 
signed, and  along  with  other  inquiry  tickets  he  carries  one 
on  Henry  Jones.  As  he  calls  upon  each  subscriber  the 
Jones  ticket  is  produced  and  the  ledger  experience  is  ob- 
tained ;  and  whether  the  subscriber  has  previously  reported 


I02       CREDIT    INFORMATION    AND    PROTECTION 

Jones  as  a  customer  or  not,  he  now  has  a  chance  to  enter  his 
name  upon  the  report,  provided  he  can  show  a  ledger 
experience. 

When  the  messengers  return  to  the  office  the  cards  on 
Henry  Jones  are  gathered,  and  the  compilers  typewrite  a 
report  which  shows  the  experience  of  each  subscriber  who 
has  furnished  a  comment.  The  district  office  is  known  by 
a  number  assigned  to  it.  Each  subscriber  is  given  a  confi- 
dential number  and  also  a  letter  which  indicates  his  line  of 
business;  for  example.  No.  1826-B  in  District  15  would 
indicate  Blank  &  Co.,  a  shoe  house  in  the  Boston  district. 
The  compiler,  in  writing  the  Jones  report,  places  the  con- 
fidential numbers  of  the  subscribers  on  the  office  or  reference 
copy,  but  usually  omits  them  except  in  a  purely  local  report. 
One  copy  of  the  report  is  furnished  to  each  house  which  has 
made  a  comment,  regardless  of  whether  the  account  is  open 
or  not.  Just  after  the  noon  hour  the  messengers  start  out 
again  on  their  rounds  and  deliver  to  the  subscribers  who 
gave  the  information,  the  completed  reports  resulting  from 
the  morning  trip;  and  also  collect  information  for  other 
reports,  if  any,  to  be  written  in  the  afternoon. 

In  this  way  the  credit  man  has  on  his  desk  a  detailed 
report  containing  the  comments  of  every  other  interested 
subscriber,  in  less  time  than  he  could  have  obtained  such  in- 
formation by  telephone,  and  at  much  less  expense  than  if  he 
had  sent  out  his  own  messenger.  Again,  the  information 
is  absolutely  correct,  because  each  credit  man  looks  over  that 
report,  and  if  he  discovers  an  error  he  is  quick  to  call  up  the 
district  office  to  make  the  correction.  It  is  customary  to 
charge  only  the  subscriber  who  makes  the  inquiry,  the  other 
subscribers  receiving  the  report  free. 

Compiling  a  General  Report 

If  a  general  report,  or  clearance,  is  desired,  the  district 


INTERCHANGE    OF    LEDGER    EXPERIENCE 


103 


manager  immediately  mails  an  inquiry  ticket  to  every  dis- 
trict office  in  the  service,  and  these  offices  serve  this  ticket 
of  inquiry  on  each  subscriber  in  their  respective  districts. 
As  soon  as  the  service  in  each  office  is  completed,  the  report 
is  mailed  back  to  the  office  from  which  the  inquiry  was 
sent.  As  these  foreign  reports  come  in  they  are  tabulated, 
and  an  advance  report  is  issued  to  the  local  inquirer  with  a 
notice  that  more  information  is  to  come.  When  the  last 
report  comes  in  from  the  most  distant  office,  the  manager 
serves  a  final  report  to  the  inquirer,  containing  all  com- 
ments. He  also  sends  copies  to  each  district  office,  one 
copy  for  each  subscriber  who  has  furnished  information, 
and  one  for  the  files  of  the  office. 

The  credit  man  who  made  the  request  now  has  a  report 
which  contains  the  ledger  experiences  of  every  subscriber 
who  is  a  creditor  of  Henry  Jones.  If  Jones  is  in  the  habit 
of  confining  his  purchases  to  his  own  local  market,  the  re- 
port will  give  a  very  clear  idea  of  the  extent  of  his  mer- 
chandise liabilities,  and  can  be  checked  against  the  state- 
ment he  has  m.ade  to  the  commercial  agencies.  On  the 
other  hand,  if  he  happens  to  be  conducting  a  large  depart- 
ment store  in  a  city,  the  report  will  probably  contain  several 
pages  of  comments  running  into  the  hundreds,  and  reveal- 
ing many  thousands  of  dollars  in  merchandise  liabilities. 
When  it  is  noted  that  only  one  subscriber  pays  for  this  long 
report  and  that  all  others  are  served  free,  one  of  the  great 
advantages  of  the  system  is  apparent.    ' 

Advantages  of  the  Clearing  House  Method 

A  house  that  can  buy  so  liberally,  as  is  often  shown  by 
the  long  list  of  creditors  in  a  report,  must  surely  be  a  large 
concern  with  a  high  rating  on  the  books  of  the  commercial 
agencies.  What,  then,  is  the  advantage  of  such  a  report? 
Primarily,  it  shows  the  credit  man  what  kind  of  treatment 


I04      CREDIT    INFORMATION    AND    PROTECTION 

to  expect  from  such  a  house.  The  large  bills  may  be  dis- 
counted, while  the  small  bills  are  practically  ignored.  Or 
the  house  may  be  guilty  of  taking  excessive  discounts,  of  re- 
turning goods  without  just  cause,  of  making  unjust  claims; 
or,  worse  still,  it  may  allow  claims  to  reach  the  hands  of  at- 
torneys. If  any  subscriber  has  had  such  experiences  as 
these  he  will  be  quick  to  note  it,  and  under  his  contract  he  is 
in  honor  bound  to  make  such  comment  in  his  report. 

This  constant  answering  of  inquiries  brings  about  the 
automatic  revision.-  A  credit  man  may  make  only  one 
original  inquiry  a  week,  yet  each  day  he  receives  a  number 
of  reports  on  his  customers,  which  keep  his  files  fresh  and 
his  department  alive  to  what  his  customers  are  doing  in  the 
way  of  maintaining  their  reputations  for  credit. 

By  taking  the  Jones  inquiry,  outlined  above,  as  a  basis, 
and  keeping  in  mind  that  each  subscriber  to  the  service 
probably  makes  one  inquiry  or  perhaps  several  a  day,  it  can 
be  estimated  what  an  enormous  amount  of  credit  informa- 
tion is  passing  through  the  mails  between  the  district  offices. 
The  infinite  care  in  handling  the  small  details,  the  exactness 
of  the  reports,  the  rapidity  in  gathering  and  serving  this  in- 
formation, all  demonstrate  the  efficiency  of  the  present 
Credit  Clearing  House,  which  has  been  developed  by  years 
of  persistent  effort.  A  system  so  national  in  scope  would 
be  impossible  to  achieve  in  a  day. 

Another  advantage  of  the  Clearing  House  service  lies 
in  the  fact  that  it  is  an  instrument  for  good  to  the  debtor 
himself.  Honest  merchants  frequently  become  badly  in- 
volved. If  a  credit  man,  who  sees  such  indications  in  a 
clearance  report,  has  the  interest  of  his  customer  at  heart, 
he  will  at  once  get  in  touch  with  him  and  warn  him  of  the 
dangerous  situation.  Often  a  merchant  may  be  saved  if 
taken  promptly  in  hand  by  his  friends  among  the  credit  men. 
If  a  merchant  should  resent  such  interference,  the  credit 


INTERCHANGE    OF    LEDGER    EXPERIENCE        105 

man  can  immediately  take  steps  to  close  the  account  and  get 
from  under  the  risk.  . 

One  of  the  greatest  benefits  to  the  mercantile  world  at 
large  and  to  credit  men  in  particular,  is  the  work  of  detect- 
ing and  preventing  overbuying  with  intent  to  perpetrate  a 
fraudulent  bankruptcy.  If  a  merchant  begins  a  system  of 
heavy  buying  and  places  a  large  number  of  first  orders,  an 
automatic  alarm  is  sounded,  and  every  district  manager  be- 
comes alert  to  watch  this  particular  risk  for  further  develop- 
ments.* If  the  occasion  warrants,  a  special  notice  is  sent  to 
every  district  ofhce  to  be  served  to  each  subscriber,  urging 
that  the  latest  clearance  be  obtained  before  checking  an 
order  from  the  party.  When  a  subscriber  receives  such  a 
notice  it  is  not  very  probable  that  he  will  take  much  of  a 
chance  on  this  particular  debtor. 

The  reports  of  the  Credit  Clearing  House,  more  than 
any  other  agency,  have  a  tendency  to  develop  that  keen  in- 
sight in  the  credit  man  which  has  been  called  by  various 
terms,  such  as  '^intuition,"  "sixth  sense,"  and  even  erron- 
eously, just  plain  "suspicion."  He  begins  to  read  between 
the  lines.  Each  comment  bears  its  own  significance.  He 
studies  the  features  underlying  each  factor  in  the  comment. 
He  practically  puts  himself  before  the  debtor  and,  figur- 
atively speaking,  assumes  the  attitude  of  each  credit  man 
who  has  passed  on  this  same  risk. 

Another  feature  of  the  service  is  the  signed  statement 
which  accompanies  many  reports.  Each  debtor  is  given  an 
opportunity  to  render  a  financial  statement  of  his  affairs, 
which  forms  a  basis  for  the  extension  of  credit  to  him  by 
the  associated  members  of  the  Credit  Clearing  House. 
Many  merchants  make  this  property  statement  and  furnish 
a  list  of  their  principal  creditors;  and  such  names  are  given 
in  detail,  provided  such  creditors  are  non-members.     But  if 


*See  Form  25,  Appendix. 


I06       CREDIT    INFORMATION    AND    PROTECTION 

any  creditors  are  members,  the  letter  indicating  their  busi- 
ness and  the  district  office  only  are  given.  The  object  of  the 
system  has  been  to  observe  strict  secrecy,  and  not  to  divulge 
the  names  of  members  who  mc^ke  comments  in  reports  to 
district  offices. 

The  Clearing  House  and  Commercial  Agency  Compared 

Only  in  the  method  of  obtaining  a  statement  does  the 
Credit  Clearing  House  approximate  the  scope  of  the  com- 
mercial agency.  Strictly  speaking,  the  commercial  agencies 
deal  with  the  customer,  the  buyer  of  goods,  and,  therefore, 
the  debtor.  The  Credit  Clearing  House  represents  the 
creditors;  it  is,  in  fact,  the  combination  or  co-ordination  of 
the  interested  creditors,  and,  therefore,  the  creditors  them- 
selves. The  commercial  agency  furnishes  the  facts  regard- 
ing the  ability,  integrity,  and  capital  of  the  debtor ;  the  Credit 
Clearing  House  tells  what  the  creditors  say  as  to  the  manner 
in  which  the  debtor  uses  these  factors  on  which  confidence  is 
based.  The  agency  establishes  a  rating,  and  by  reporting 
this,  suggests  a  margin  of  safety,  and  so  becomes  an  ad- 
viser. The  Credit  Clearing  House  offers  no  estimates,  as- 
signs no  financial  rating,  gives  no  advice;  it  lays  before  the 
credit  man  the  facts  taken  from  the  ledgers  of  other  credit 
men,  and  leaves  him  to  make  his  own  deductions  and  act 
upon  his  own  judgment.  Neither  the  commercial  agency 
nor  the  Credit  Clearing  House  should  encroach  upon  the 
work  of  the  other.  5^ch  is  a  specialist  in  its  own  line,  and 
these  lines  are  far  apart,  since  they  deal  with  the  subject 
from  entirely  different  viewpoints. 


CHAPTER    X 

CHECKING   ORDERS    FOR   CREDIT 

Incoming  Orders 

Assuming  that  the  organization  of  the  credit  office  has 
been  completed,  it  may  be  well  to  follow  the  course  of  an 
order  from  the  time  it  comes  out  of  the  mail,  in  order  to 
illustrate  a  practical  application  of  the  principles  underlying 
the  granting  of  credit. 

When  the  order  is  received  it  is  entered  upon  the  order 
record,  which  contains  the  name  and  address  of  the  cus- 
tomer, the  approximate  amount  of  the  order,  a  serial  number 
given  it  by  the  salesman,  the  office  serial  number,  the  date 
received,  and  the  date  for  shipping.  A  space  is  left  to  show 
on  what  date  the  order  is  checked  out  for  shipment  by  the 
credit  office.  The  record  book  is  arranged  so  that  the  order 
numbers  run  serially. 

The  order  is  accompanied  by  the  salesman's  credit  re- 
port,'*' which  with  some  houses  forms  the  basis  of  the  credit 
report  file.  Other  houses  use  a  sheet  for  classification  of 
information,!  which  is  pinned  to  the  customer's  order,  and 
information  from  other  houses  is  then  written  on  this  sheet. 
If  either  sheet  is  used  to  start  the  file  the  ratings  from  the 
agency  books  are  at  once  recorded  on  it,  because  the  rela- 
tive strength  of  the  customer  determines  to  a  large  extent 
the  thoroughness  of  the  investigation. 

Investigation  of  Orders 

All  orders  may  be  classified  as  follows :  first,  those  from 
old  customers  whose  credit  is  unquestioned  and  whose  bills 


*Forms  i  and  2,  Appendix. 
fForm  24',  Appendix. 


107 


Io8       CREDIT    INFORMATION    AND    PROTECTION 

are  usually  discounted;  second,  orders  from  old  customers 
who  should  be  investigated,  or  at  least  considered  in  more 
than  a  superficial  way ;  third,  orders  from  new  customers. 

Initial  orders,  even  when  small,  should  be  thoroughly 
investigated.  It  is  not  good  policy  to  allow  a  first  order  to 
slip  through  because  it  is  small,  with  the  intention  of  look- 
ing it  up  afterward  and  refusing  the  second  order  if  in- 
formation is  unfavorable.  The  time  to  refuse  credit  is 
before  the  first  order  is  shipped.  There  are  many  plausible 
excuses  which  can  be  given  a  purchaser  for  failure  to  ship, 
without  bluntly  telling  him  that  he  is  no  good.  There  may 
be  some  items  on  a  small  order  that  are  not  in  stock,  the 
order  may  be  too  small  to  warrant  opening  a  time  account 
or  to  stand  the  expense  of  a  thorough  investigation,  or  other 
perfectly  legitimate  reasons  for  declining  may  exist.  If 
the  first  order  slips  through  easily,  the  purchaser  will  almost 
invariably  try  out  the  house  the  second  time.  Then  to  write 
him  that  his  account  is  undesirable  savors  of  indecision  and 
lack  of  method,  and  is,  in  fact,  amateurish.  If  a  small  order 
is  declined  courteously,  a  possible  customer  may  be  saved 
for  future  dealings. 

It  is  obvious  that  an  order  from  a  well-rated  concern 
demands  less  investigation  than  one  fromi  a  house  of  limited 
rating,  though  both  should  be  looked  into  unless  recent  and 
complete  information  is  already  on  file.  Assuming  that  an 
order  is  received  from  a  merchant  with  an  M-4  rating,  a 
careful  investigation  is  advisable,  and  a  report  is  ordered 
from  one  of  the  commercial  agencies.  Information  request 
blanks,  also,  are  filled  out  and  mailed  to  the  houses  given 
as  references  on  the  salesman's  credit  report,  and  it  may  be 
assumed  that  in  addition  a  special  report  will  be  ordered 
from  the  Credit  Clearing  House. 

As  soon  as  the  report  arrives  from  the  commercial  agency 
the  credit  man  proceeds  to  analyze  it,  and  decides  whether 


CHECKING    ORDERS    FOR    CREDIT 


109 


there  is  anything  special  that  requires  an  explanation,  such 
as  suits,  mortgages,  fires,  previous  failures,  etc.  If  the  re- 
port is  reasonably  clean  and  shows  that  the  merchant  has  a 
fairly  good  record,  an  ordinary  request  for  a  narrative  re- 
port may  be  mailed  to  the  attorney  in  the  customer's  locality. 
The  attorney  may  be  one  known  to  the  credit  man,  or  he  may 
be  selected  from  a  list.  An  information  request  is  also 
mailed  to  the  customer's  bank  and  often  to  one  or  more 
banks  in  his  town,  provided  it  is  a  small  town.  The  banks 
in  large  cities  have  not  the  time,  as  a  rule,  to  make  free  re- 
ports on  small  concerns,  and  it  is  best  to  address  the  request 
only  to  the  bank  of  the  customer,  should  he  live  in  a  town 
of  considerable  size.  The  bank  is  usually  glad  to  make  a 
report  on  one  of  its  depositors  when  asked  to  do  so  by  the 
credit  department  of  a  mercantile  house,  in  order  to  help 
establish  the  customer's  credit. 

Again,  let  it  be  understood  that  it  is  impossible  to  gather 
too  much  information  about  a  customer.  Sometimes  the 
majority  of  reports  are  very  favorable,  and  just  when  the 
credit  man  has  made  up  his  mind  to  check  out  the  order  he 
receives  a  report  from  some  source  which,  upon  investiga- 
tion, proves  that  the  party  is  far  from  being  a  desirable 
credit  risk.  It  must  be  remembered  that  the  condition  of 
a  merchant's  business  is  liable  to  constant  change.  It  has 
been  said  that  there  is  no  such  thing  as  a  business  standing 
still — it  must  either  advance  or  lose  ground.  This  is  true 
from  a  sales  and  advertising  standpoint,  but  not  necessarily 
so  from  the  standpoint  of  the  credit  department;  for  a 
business  might  drag  along  in  a  rut  for  years,  barely  making 
a  living  for  its  owner,  who  is  yet  able  to  pay  his  bills. 
Again,  a  business  seemingly  prosperous  in  the  spring  might 
become  bankrupt  in  the  fall.  One  has  only  to  study  the 
causes  of  failure  to  see  for  himself  just  what  a  risky  thing 
selling  goods  on  credit  is. 


no       CREDIT    INFORMATION    AND    PROTECTION 

Commercial  Agency  Reports 

As  an  illustration  of  how  the  reports  appear  when  they 
come  in,  a  typical  case  has  been  selected  to  show  a  com- 
mercial report  and  other  reports  properly  filled  out  and  ar- 
ranged to  lay  before  the  credit  man  for  his  judgment  on 
the  risk. 

An  order  for  $300  is  sent  in  by  the  salesman  from  John 
Harris  of  Prosperityville.  On  the  salesman's  information 
sheet  is  shown  the  names  of  four  houses  from  whom  John 
Harris  has  been  purchasing. 

The  report  from  the  commercial  agency  will  read  about 
as  follows:* 

John  Harris Genl.  Store Prosperityville,  Tenn. 

Age  41,  Married. 

Our  traveling  reporter  called  at  his  place  of  business  on  June  16, 
1913,  and  requested  statement,  but  same  was  declined. 

The  first  statement  obtained  bears  date  of  February  25,  1911, 
showing  total  resources  of  $4,850,  consisting  of  merchandise,  $2,800; 
notes  and  accounts  receivable,  $800;  cash,  $100;  fixtures,  $100;  home- 
stead, $1,000;  and  other  assets,  bank  stock,  $50,  with  total  indebtedness 
of  $1,500,  all  of  which  was  on  open  account  for  merchandise. 

He  claimed  annual  sales  of  $6,000.  Insurance  on  merchandise  and 
fixtures,  $1,400.  Has  never  suffered  a  fire  loss.  The  homestead  given 
in  this  statement  stands  on  record  in  name  of  John  Harris  and  is 
located  in  Blank  County. 

Authorities  at  present  advise  that  he  carries  a  stock  of  $1,800, 
his  collectable  accounts  are  valued  at  $300  to  $400,  and  he  is  the  reputed 
owner  of  a  homestead  valued  at  $1,000.  Over  allowances  for  legal 
exemptions,  indebtedness  and  other  contingencies  he  is  conceded  a  net 
worth  of  $500  to  $600. 

Antecedent 

He  came  to  this  place  from  Ohio  and  took  over  the  business 
previously  conducted  by  Richard  Roe,  prior  to  which  he  was  employed 
as  a  salesman  and  bookkeeper.  Since  commencing  this  business  he  is 
believed  to  have  made  some  small  headway. 


*  It  is  an  invariable  rule  with  the  large  agencies  not  to  furnish  information 
except  to  a  subscriber,  and  in  no  case  and  under  no  circumstances  can  this  infor- 
mation be  divulged.  The  illustration  is  merely  to  show  the  form  and  character 
of  a  commercial  report  and  the  data  given  is  purely  fictitious. 


CHECKING  ORDERS  FOR  CREDIT       m 

Summary 

Locally  he  is  well  regarded  and  is  a  man  of  good  general  standing, 
but  is  said  to  be  sometimes  slow  in  the  discharge  of  his  obligations. 
Agency  Nos.* Rating  YF  or  M-4 June  16,  1914 

Later — Additional 

He  has  not  replied  to  our  request  for  statement  mailed  December 
28,  1914.  Authorities  consulted  know  of  no  changes  of  importance 
since  our  former  detailed  report.  He  is  thought  to  have  invested  from 
$1,500  to  $2,000.  Said  to  own  real  estate  valued  at  from  $1,000  to  $1,200 
and  is  believed  still  worth  from  $500  to  $600  net.  Continues  in  good 
general  standing,  said  to  be  of  good  habits  and  is  now  reported  as 
fairly  prompt  in  meeting  his  obligations. 
Agency  Nos Rating  YF  or  M-4 January  22,  1915 

Analysis  of  the  Report 

Analyzing  the  above  report,  the  facts  to  be  noted  are 
these :  John  Harris  objects  to  making  a  signed  statement  to 
the  commercial  agencies.  The  present  rating  is  assigned 
on  the  strength  of  a  report  made  over  two  years  previously. 
The  amount  of  insurance  is  small  on  a  stock  of  $2,800,  but 
it  must  be  remembered  that  John  Harris'  store  is  located  in 
a  very  small  village,  and  insurance  on  a  country  store  is 
hard  to  obtain.  The  amount  of  sales  is  apparently  small, 
but  it  is  assumed  that  his  expenses  and  cost  of  living  are  also 
small.  A  little  store  like  this,  with  careful  management, 
might  realize  from  10  to  12  per  cent,  net  on  its  sales.  His 
homestead  would  probably  be  entirely  exempt  under  the 
laws  of  the  state  in  which  John  Harris  resides,  as  his  real 
estate  exemptions  are  probably  fixed  at  $1,000  by  statute. 
His  location  is  in  a  good  farming  section  and  his  book  ac- 
counts are  probably  better  than  the  average.  Antecedent 
information  is  very  favorable,  because  he  has  had  experience 
as  a  salesman  and  as  an  office  man.  Note  that  in  the  ad- 
ditional report  the  agencies  state  that  he  is  fairly  prompt 


*This  being  a  sample  report,    the  rating  of  both  agencies  is  assigned  to  this 
fictitious  subject. 


112       CREDIT    INFORMATION    AND    PROTECTION 

in  meeting  his  obligations,  whereas  in  the  former  report  he 
was  reported  as  slow. 

Nothing  can  better  illustrate  the  difficulties  which  con- 
front the  two  great  commercial  agencies.  John  Harris  re- 
fuses to  make  a  report,  and  what  information  can  be  gath- 
ered is  largely  hearsay  evidence;  but  when  all  facts  are 
analyzed,  and  if  the  business  were  put  on  the  auction  block, 
the  exemptions  allowed,  and  all  other  contingencies  consid- 
ered, it  would  probably  be  safe  to  say  that  John  Harris 
could  net  over  all  debts  as  much  as  the  $600  allowed  to  him 
by  the  agency  ratings. 

In  analyzing  a  report  it  is  well  to  mark  or  underline  im- 
portant points  with  a  blue  pencil  so  that  they  will  stand  out 
at  all  times  and  not  escape  attention. 

Credit  Clearing  House  Report 

Quite  a  different  report  is  that  of  the  Credit  Clearing 
House,  which  is  shown  on  page  114.  This  will  be  noted  as 
bearing  the  date  of  the  credit  man's  original  investigation, 
while  his  own  $300  order  heads  the  report.  This  report  is 
an  excellent  showing  for  the  merchant  under  investigation. 
The  figures  are  taken  from  the  ledgers  of  the  subscribers 
who  answered  the  inquiry,  and  represent  actual  transactions 
between  the  customer  and  the  creditors. 

The  favorable  points  shown  by  this  Credit  Clearing  House 
report  are  these:  Harris  confines  his  purchases  mainly  to 
one  market."  Only  in  two  instances  does  he  appear  to  have 
received  unusually  large  lines  of  credit,  and  upon  inquiry 
direct  to  the  subscriber,  reporting  as  "D-860-0- 183-0- 
discounts,"  the  report  comes  back  verifying  the  figures  with 
a  further  notation — "Trade  reports  are  good  and  we  con- 
sider it  a  very  desirable  account." 

Another  reference  reports,  "H.  C.  $30.  Owes  o.  Sold 
13  and  14.     Discounts  all  bills." 


CHECKING  ORDERS  FOR  CREDIT 


113 


A  grocery  house  on  the  C.  C.  H.  list  says,  "We  think 
safe." 

A  hardware  house  to  whom  he  owes  nothing  at  this 
time  says,  "This  was  a  good  Httle  account  which  we  lost  for 
some  reason.  Was  prompt  and  desirable.  Would  be  glad 
to  ship  again." 

The  salesman  sending  in  the  order  noted  on  his  sheet, 
"I  think  Mr.  Harris  has  about  $2,000  worth  of  good,  clean 
stock.  Everybody  here  says  he  is  good.  He  owns  some 
property  and  has  just  bought  some  more,  several  acres  near 
his  home.  I  hear  he  paid  for  it  in  cash.  He  will  not  talk 
about  his  finances.  Our  competitor  has  been  selling  for 
some  time  and  they  are  still  anxious  to  sell  him." 

The  "competitor"  to  which  the  salesman  refers  is 
"B-5 20-0-0-0- slow"  on  the  C.  C.  H.  report.  Upon  direct 
inquiry  they  state  that  payments  were  ranging  from  prompt 
to  thirty  days  slow  and  the  account  was  desirable  in  every 
respect. 

The  bank  states,  "He  is  one  of  our  valued  customers. 
He  never  asks  any  accommodation,  and  we  are  of  the 
opinion  that  he  is  good  for  anything  he  buys." 

A  lawyer  states,  "I  think  you  will  be  safe  in  shipping 
$300.  Harris  is  a  good,  honest,  and  enterprising  small 
merchant.  So  far  as  I  know  he  meets  his  bills  promptly. 
Have  never  heard  of  a  complaint  nor  have  I  ever  heard  of 
a  claim  or  suit  against  him.  He  owns  a  nice  home  and  a 
plot  of  ground  on  v/hich  his  store-house  also  is  located ;  the 
whole  is  worth  probably  from  $2,000  to  $2,300.  No  mort- 
gage against  it.     He  is  in  a  good  farming  section." 


114 


CREDIT    INFORMATION    AND    PROTECTION 

5_R_2-ll 
THE   CREDIT    CLEARING   HOUSE   REPORT 

February  20,  1914 
John  Harris,  Prosperityville,  Blank  County,  Tenn. 


U 

•s 

O 

c 

o  o 

$ 

$ 

$ 

$ 

SOUTHEASTERN  DISTRICT 

29] 

?  B 

0 

300 

0 

0 

first  order- 

EAST  TENNESSEE  DISTRICT 

602 

G 

25 

0 

0 

0 

when  due 

sold  years- 

610 

G 

70 

0 

26 

0 

slow 

when  due^sold  1907  to  Feb- 
ruary, 1914- 

619 

N 

17 

0 

0 

0 

when  due 

sold  1913- 

620 

5 

13 

0 

0 

0 

discounts 

sold  May,  1913  to  present- 

621 

Q 

40 

0 

0 

0 

prompt 

sold  years  to  date- 

622 

J 

60 

0 

0 

0 

discounts 

sold  years  to  May  1913- 

628 

B 

520 

0 

0 

0 

slow 

sold  1909  to  1913- 

631 

H 

49 

0 

8 

8 

little  slow- 

sold  some  time  to  February, 
1914- 

634 

C 

368 

0 

0 

0 

when  due 

to  60  days  slow-sold  1909  to 
March,  1913- 

638 

H 

95 

0 

0 

0 

discounts 

sold  June,  1913,  to  January, 
1914- 

645 

g 

100 

0 

0 

0 

little  slow 

sold  years  to  date- 

646 

D 

860 

0 

183 

0 

discounts 

sold  1911  to  February,  1914- 

655 

G 

200 

0 

120 

0 

discounts 

sold  years  to  date- 

663 

J 

133 

0 

0 

0 

discounts 

sold  November,  1912,  to  Sep- 
tember, 1913- 

Conclusions  from  Reports 

To  sum  up  the  entire  list  of  reports,  it  appears  that  it 
would  be  safe  to  ship  John  Harris  $300  in  practically  any 
of  the  following  lines :  shoes,  dry  goods  and  notions,  cloth- 
ing, or  even  groceries,  should  he  buy  as  much  of  the  last  at 
one  time.  He  would  also  be  good  for  the  same  amount  in 
millinery^  hats,  or  hardware  (including  farm  implements), 
although  it  will  be  seen  that  he  has  not  made  a  practice  of 
buying  these  last-named  lines  in  large  quantities. 

John  Harris  evidently  does  most  of  his  own  work;  car- 


CHECKING    ORDERS    FOR    CREDIT 


115 


ries  a  small  stock ;  buys  small  and  often,  and  turns  his  stock 
three  or  four  times  during  the  year.  From  all  reports  he 
is  making  a  success  in  his  small  business,  and  his  buying  ad- 
ditional real  estate  and  paying  cash  show  that  he  is  able  to 
take  money  out  of  his  business  without  crippling  it,  for  he 
is  still  reported  as  prompt  pay.  Sometimes  it  is  a  bad  sign 
when  a  merchant  takes  money  out  of  the  business  to  invest 
in  unprofitable  real  estate,  and  this  is  a  special  "failing" 
with  a  great  many  small  merchants. 

While  most  of  the  comments  in  the  Credit  Clearing 
House  report  show  that  his  methods  of  paying  are  good, 
the  real  strength  of  the  report  lies  in  the  fact  that  John 
Harris  has  been  receiving  liberal  lines  of  credit,  is  confining 
his  business  closely  to  a  few  houses,  and  owes  but  little — 
there  is  only  the  small  sum  of  $8  due  at  the  time  of  the 
report.  The  principal  references  sent  in  by  the. salesman 
were  all  on  members  of  the  Credit  Clearing  House,  who 
report  on  the  present  sheet.  If  the  salesman  looked  care- 
fully through  the  stock  and  noticed  only  the  goods  from 
these  references,  it  is  a  safe  conclusion  that  John  Harris 
owes  very  little,  if  anything,  outside  of  the  members  of  the 
Credit  Clearing  House  on  the  report  sheet.  The  report 
shows  that  he  owes  only  $337  all  told,  and  with  the  order  of 
$300  the  total  liabilities  would  still  be  well  within  the  bounds 
of  safety. 

Collateral  Data 

In  reading  a  report  on  a  prospective  customer  it  is  well 
to  train  the  mind  to  inquire  about  and  consider  carefully 
the  following  points,  which  have  been  fully  explained  in 
earlier  chapters :  age ;  married  or  single ;  past  record  for 
fires  and  business  troubles;  character  and  habits;  local  stand- 
ing in  the  community;  experience;  ability;  location  with 
regard  to  competition;  location  as  to  growth  and  develop- 


Il6       CREDIT    INFORMATION    AND    PROTECTION 

merit  of  the  business  itself;  and  local  conditions  of  sur- 
rounding country.  Then  the  question  of  assets  and  liabil- 
ities should  be  taken  up  and  each  item  carefully  analyzed 
and  comparisons  made.  If  this  practice  is  followed  in 
judging  every  risk,  the  mind  soon  forms  a  habit  of  sys- 
tematic analysis,  and  automatically  looks  for  an  answer  to 
each  of  the  questions  that  can  be  asked  regarding  the  vari- 
ous points  enumerated.  This  might  seem  difficult  at  the 
start,  but  constant  practice  develops  the  habit.  Until  such 
analytical  habits  have  become  second  nature,  the  credit  man 
should  be  very  careful  about  checking  through  credits  for 
shipment. 

Handling  the  Order 

After  the  order  is  O  K'd  by  the  credit  man  it  goes  to 
the  order  fillers,  or  those  who  get  out  the  order  from,  stock 
and  turn  it  over  to  the  packing  and  shipping  department. 
In  most  houses,  when  the  order  itself  is  O  K'd,  the  order 
sheet  carries  the  shipping  instructions.  In  many  of  the 
large  houses,  especially  those  which  are  departmentalized,  a 
sheet  called  a  "lead  ticket"  is  used.  This  contains  the 
shipping  instructions;  spaces  for  each  department  head  to 
check  and  place  his  initials  when  goods  are  delivered  from 
his  department;  and  final  instructions  to  the  charge  clerk, 
packers,  and  shipping  clerk.  This  lead  ticket  is  O  K'd  by 
the  credit  man,  and  after  the  order  is  charged  the  amount 
of  the  bill  is  recorded ;  then,  just  before  the  cases  are  ready 
for  delivery  to  the  drayman,  the  ticket  is  sent  back  for  final 
O  K  and  release. 

This  final  O  K  is  important.  Suppose  an  order  comes 
fronfi'  a  dangerous  account  for,  say,  a  case  of  something  and, 
because  it  is  badly  w'ritten,  the  order  clerk  in  a  hurry  ships 
a  carload.  The  mistake  will  be  recognized  when  the  credit 
man  sees  the  amount  recorded  on  the  lead  ticket  before  he 


CHECKING    ORDERS    FOR    CREDIT  117 

signs  his  release  O  K.  This  may  seem  needless,  but  it  is 
really  very  important.  For  instance,  a  hardware  house 
sells  small  bills  in  80  or  90  per  cent  of  its  orders,  yet  it  is 
not  uncommon  to  see  a  mail  order  of  three  or  four  lines  of 
goods  run  into  several  thousand  dollars,  as  when  powder, 
fuse,  etc.,  are  ordered  by  a  mining  commissary.  A  big  dry- 
goods  house  ships  cheap  sheeting  by  the  bolt  to  small  cus- 
tomers and  by  the  bale  to  large  merchants.  A  big  provision 
house  ships  a  case  of  eggs  to  one  man  or  a  car  of  eggs  to 
another.  The  sum  of  the  matter  is  this :  The  shipping  clerk 
is  not  the  credit  man ;  he  has  no  discretion  when  it  comes  to 
the  size  of  the  bill  to  be  shipped,  and  he  packs  and  ships 
whatever  is  sent  to  his  department.  A  double  check  may 
sound  like  "red  tape,"  but  it  will  pay  for  itself  many  times 
over  if  it  stops  one  bad  mistake  each  year. 


CHAPTER    XI 

SAFETY    APPLIANCES    IN    THE    CREDIT    DE- 
PARTMENT 

The  Signed  Statement — Verbal  Statement 

A  safety  appliance  in  the  credit  sense  is  an  instrument 
for  the  prevention  as  well  as  for  the  alleviation  of  credit 
troubles.  It  refers  particularly  to  those  precautionary 
measures  of  the  credit  department  which  warn  the  credit 
man  of  the  approach  of  disaster,  or  help  him  when  he  finds 
himself  facing  a  loss.  First  in  importance  of  these  is  the 
customer's  signed  statement  of  assets  and  liabilities.  This 
may  prevent  trouble,  if  properly  read  and  construed,  by 
avoidance  of  poor  risks,  and  later  may  be  used  as  a  lever  to 
bring  pressure  to  bear  upon  a  delinquent  customer  to  whom 
credit  has  been  extended  upon  the  strength  of  a  statement 
which  proves  to  be  materially  false. 

In  some  states  a  verbal  statement  is  just  as  binding  as 
one  written  and  signed :  and  if  found  materially  false,  con- 
viction may  be  obtained  upon  proper  proof,  under  the  sec- 
tion of  the  Criminal  Code  relating  to  false  pretense.  But 
even  in  these  states,  the  written  statement,  duly  signed  and 
witnessed,  is  plainly  to  be  preferred,  as  it  is  to  a  great  ex- 
tent prima  facie  evidence.  All  representations,  therefore, 
either  in  answer  to  questions  or  as  voluntary  explanations., 
should  be  incorporated  in  writing  over  the  signature  of  the 
applicant,  and  the  same  care  should  be  exercised  as  if  the 
credit  man  actually  intended  to  use  the  statement  as  evidence 
in  court.  The  applicant  should  be  impressed  with  the  fact 
that  such  statement  is  being  made  for  the  express  purpose 
of  obtaining  credit,  and  that  any  allegation  to  this  end 

it8 


SAFETY    APPLIANCES  II9 

should  be  embodied.     Good  forms  for  financial  statements 
appear  in  the  Appendix,  numbers  14-21. 

Fortunately  the  percentage  of  false  statements  is  small; 
but  the  credit  man  who  has  ever  collected  a  desperate  ac- 
count through  the  leverage  of  the  false  statement,  immedi- 
ately becomes  a  confirmed  believer  in  the  value  of  the  signed 
statement,  proceeds  to  incorporate  the  system  of  procuring 
such  statements  in  his  credit  work,  and  makes  them  the  most 
important  feature  of  his  files. 

The  "Container" 

Where  a  statement  is  sent  by  a  customer  through  the 
mail,  it  is  vitally  necessary  that  the  container — the  envelope 
— be  preserved,  and  that  the  person  who  received  and  opened 
the  envelope  should  place  thereon  the  date,  time  of  receipt, 
his  own  initials,  and  those  of  a  responsible  witness ;  and  both 
parties  should  be  prepared  to  swear  that  said  statement  was 
received  in  that  identical  envelope.  An  envelope  identified 
in  such  manner  has  been  held  prima  facie  evidence  in  court. 
In  the  Appendix  a  "self -contained"  form  of  financial  state- 
ment is  shown,  in  which  the  container  is  part  of  the  form 
and  is  therefore  largely  self-proving. 

Getting  the  Statement 

The  average  merchant,  large  or  small,  is  averse  to  giving 
a  statement.  The  agencies  have  always  encountered  this 
prejudice,  but  after  sixty  years  of  effort  they  have,  to  some 
extent,  overcome  it  and  have  educated  the  commercial  world 
into  the  practice  of  furnishing  such  information.  Only  of 
late  years,  however,  has  the  systematic  taking  of  statements 
been  practiced.  Formerly  the  stranger,  when  desiring 
credit,  usually  made  a  statement  of  his  own  volition,  and 
after  the  account  wae  opened  no  further  statements  were 
thought  necessary,  the  ledger  record  being  depended  upon 


I20       CREDIT    INFORMATION    AND    PROTECTION 

as  an  index  to  the  merchant's  progress.  This  was  wrong. 
If  the  house  is  selHng  a  customer  heavily  year  in  and  out,  a 
statement  should  be  requested  annually,  and  when  this  is  re- 
ceived the  files  should  be  thoroughly  revised  and  the  cor- 
rectness of  the  statement  proved.  It  should  not  be  inferred 
from  this  that  such  revision  of  the  files  should  be  made  but 
once  during  the  year.  The  annual  statement  should  form  a 
basis  for  a  new  annual  file  on  the  customer,  which  is  kept 
alive  during  the  year  by  constant  additions,  such  as  the  re- 
cording of  inquiries  and  interchanges  of  ledger  experiences 
with  other  interested  creditors,  either  by  direct  correspond- 
ence or  through  the  medium  of  the  Credit  Clearing  House. 

The  credit  man  can  frequently  overcome  the  prejudice 
of  a  customer,  where  this  exists,  and  obtain  his  statement  by 
means  of  a  series  of  diplomatic  letters.  Credit  is  founded 
on  confidence,  and  this  confidence  between  jobber  and  retail 
merchant  can  obtain  only  through  a  knowledge  of  the  mer- 
chant's financial  condition.  Should  the  merchant  desire  the 
favor  of  a  liberal  line  of  credit,  with  extension  of  bills  after 
maturity,  such  favors  can  be  extended  with  safety  to  the 
house  only  after  its  credit  man  has  been  thoroughly  informed 
as  to  the  condition  of  the  debtor. 

When  a  statement  has  been  received  from  a  customer 
the  matter  must  not  be  allowed  to  end  there.  Acknowledge 
a  statement  always;  make  a  few  comments  and  criticisms, 
and  some  good  suggestions  if  possible,  to  let  the  customer 
feel  that  there  exists  a  friendly  interest  in  his  welfare. 
When  the  time  rolls  around  again  for  requesting  another 
statement  the  customer  will  remember  such  treatment  and 
it  will  be  almost  a  matter  of  pride  with  him  to  see  that  it  is 
duly  furnished. 

Investigating  the  Statement 

In  some  states  the  courts  have  held  that  when  a  state- 


SAFETY    APPLIANCES  12 1 

ment  has  been  received  it  is  incumbent  upon  the  recipient  to 
exercise  due  diligence  in  ascertaining  its  correctness,  so  far 
as  he  may  be  able.  No  other  course  is  safe.  No  sane  credit 
man  would  blindly  extend  credit  on  the  strength  of  a  state- 
ment which  he  knew  to  be  false.  No  more  should  he  ex- 
tend credit  on  the  strength  of  a  statement  which  he  does  not 
know  is  correct.  The  first  statement  should  itself  be  merely 
an  index  or  guide  for  further  investigations.  It  stands  to 
reason  that  such  items  as  real  estate  or  other  assets  of  public 
record  should  be  investigated,  not  only  as  to  their  actual  ex- 
istence, but  also  as  to  their  approximate  value.  The  mere 
overvaluation  of  real  estate  has  been  held  as  not  necessarily 
a  crime  in  itself. 

False  Statement  Laws 

Many  of  the  states  have  enacted  laws  pertaining  to  false 
statements,  and  eventually  all  the  states  will  doubtless  have 
such  laws  on  their  statute  books.  Most  of  the  state  laws 
class  the  making  of  a  false  statement  as  a  misdemeanor,  pun- 
ishable by  jail  sentence;  but  in  flagrant  cases  false  pretense 
may  be  successfully  prosecuted  as  a  felony.  It  is  to  the 
Federal  statute  that  we  look  for  severity  of  punishment  as 
well  as  for  thoroughness  in  prosecution. 

It  is  worth  while  for  any  credit  man  to  submit  a  test  case 
to  a  competent  attorney  and  have  him  prepare  a  brief  with 
full  explanation  of  the  statute  against  false  statements.  The 
paragraph  in  the  law  refers  more  particularly  to  lotteries  and 
similar  offenses ;  but  through  numerous  decisions  the  point 
has  now  been  reached  where  the  statute  is  construed  to  em- 
brace in  its  provisions  any  scheme  or  artifice  to  defraud  in 
which  the  United  States  mails  are  used  as  the  medium. 
Therefore,  in  addition  to  the  statement  and  the  envelope,  it 
is  necessary  to  show  that  a  scheme  or  artifice  to  defraud  has 
been  devised,  and  that  the  party  at  fault  made  the  false  state- 


122       CREDIT    INFORMATION    AND    PROTECTION 

meiit  with  the  intent  to  defraud  the  party  to  whom  it  was 
addressed,  and,  for  the  furtherance  of  such  scheme  or  arti- 
fice, placed  the  said  statement  in  the  mails. 

Prosecutions — State  Courts 

The  prosecution  for  making  a  false  statement  must  be 
begun  where  the  crime  was  committed,  and  the  courts  have 
held  that  this  is  where  credit  was  extended  and  where  the 
business  was  transacted.  Such  questions  are  frequently 
fought  bitterly  in  the  state  courts,  the  defendant  usually 
seeking  to  get  the  case  into  his  own  court  among  his  friends 
and  neighbors.  Where  prosecution  is  necessary  an  indict- 
ment might  be  secured  by  the  credit  man  in  his  home  town, 
where  he  alleges  the  credit  was  extended;  but  if  the  debtor 
lives  in  another  state  extradition  might  be  fought  on  the 
grounds  that  the  transfer  of  the  alleged  criminal  is  not 
sought  for  the  good  of  the  community,  but  for  the  real  pur- 
pose of  collecting  a  debt.  Then  there  is  always  the  danger 
of  a  criminal  prosecution  before  a  jury.  The  only  certain 
thing  in  litigation  is  its  uncertainty.  The  failure  to  win  a 
case  through  successful  prosecution  may  subject  the  pros- 
ecutor to  a  severe  damage  suit. 

Prosecutions — Federal  Courts 

If  a  strong  case  can  be  developed  in  the  federal  courts, 
conviction  is  more  certain  than  in  the  state  courts,  and  the 
penalties  are  far  more  severe.  When  a  prosecution  is  begun 
in  a  state  court,  the  offender  may  offer  to  compromise  or  to 
pay  in  full ;  and  such  settlement  can  be  made  even  after  in- 
dictment. The  prosecution  may  then  be  dismissed,  or  an 
agreed  verdict  rendered  in  favor  of  the  defendant,  or  the  case 
may  be  called  and  dismissed  through  failure  of  the  prose- 
cutor to  appear.  In  the  Federal  courts,  on  the  other  hand, 
it  is  not  so  easy  to  procure  the  dismissal  of  a  case,  and  of- 


SAFETY    APPLIANCES 


123 


fenders  are  learning  that  a  statement  through  the  mails 
which  is  false  in  a  material  sense,  is  certain  to  prove  trou- 
blesome. In  such  cases  a  settlement  is  often  obtainable, 
and  it  is  then  only  common  sense  and  good  business  practice 
to  collect  the  debt  and  let  the  culprit  go,  thereby  avoiding 
delay,  annoyance,  and  possible  financial  loss. 

Ethics  vs.  Prudence 

In  such  cases,  however,  the  ethical  or  moral  aspect  of 
the  proceeding  must  be  considered,  since  the  failure  to  pros- 
ecute encourages  dishonesty  and  places  a  premium  on  fraud. 
Makers  of  false  statements  soon  learn  that  it  is  only  neces- 
sary to  dig  up  a  settlement  to  secure  immunity  from  prose- 
cution. For  the  good  of  the  credit  system  generally,  every 
case  of  false  statement  ought  to  be  prosecuted  to  the  bitter 
end ;  but,  as  a  matter  of  practice,  each  man  decides  for  him- 
self according  to  his  own  conscience  or  his  own  pocket- 
book. 

The  common  sense  way,  however,  is  to  avoid  litigation 
if  possible,  and  to  use  the  signed  statement  as  a  club  to 
coerce  the  debtor  into  a  settlement.  It  is  well  to  follow  the 
example  of  a  good  trader  in  such  cases  and  never  "show 
your  hand."  The  offender  or  his  attorney  should  be  pre- 
vented from  seeing  the  original  statement,  if  the  offender 
did  not  retain  a  copy.  It  is  the  uncertainty  that  the  crim- 
inal fears.  He  is  not  afraid  of  what  he  can  see  or  what  his 
lawyer  can  study  out,  but  if  the  basis  for  prosecution  is 
merely  stated  and  the  details  carefully  concealed,  the  de- 
fendant and  his  lawyer  are  kept  constantly  "guessing"  and 
the  psychological  element  frequently  proves  strong  enough 
to  secure  a  settlement. 

Recoveries 

It  sometimes  happens  that  a  merchant  fails,  or  his  store 


124       CREDIT    INFORMATION    AND    PROTECTION 

is  closed,  a  few  days  after  a  bill  of  goods  has  been  shipped. 
In  practically  all  the  states  there  exists  the  right  of  stoppage 
in  transit,  or  change  in  transit,  and  many  a  bill  has  been 
saved  through  the  alertness  of  the  credit  department  in  ex- 
ercising this  right.  Should  a  merchant  get  into  trouble 
immediately  following  a  shipment,  an  order  by  wire  to  stop 
delivery  must  be  instantly  issued  to  the  railroad.  There  are 
doubtless  many  instances  in  the  experience  of  every  credit 
man  where  goods  which  have  been  delayed  by  accident  or 
sheer  luck  have  been  successfully  stopped.  The  credit  man 
should  not  abandon  the  fight  until  notice  has  been  received 
that  the  goods  are  actually  in  the  possession  of  the  con- 
signee. 

Replevin 

The  laws  governing  replevin  of  goods  should  be  care- 
fully studied  by  the  credit  man.  In  most  states  an  action 
to  replevin  will  lie,  and  a  prosecution  will  be  successful, 
where  it  can  be  shown  that  the  debtor  was  in  a  failing  con- 
dition or  knew  he  was  insolvent  and  unable  to  pay  for  the 
goods  at  the  time  the  shipment  was  made.  Also,  in  case 
any  other  fraud  can  be  proved,  a  recovery  will  be  success- 
ful, because  if  fraud  exists  the  title  to  the  goods  does  not 
pass  from  vendor  to  vendee.  This  is  only  a  general  state- 
ment, as  the  law  varies  slightly  in  different  states;  but  the 
same  principle  exists  in  practically  all. 

Reclamations 

The  right  to  reclaim  goods  is  recognized  in  the  bank- 
ruptcy statute.  Where  the  bankrupt  has  made  a  materially 
false  statement  to  a  commercial  agency,  and  where  credit 
has  been  extended  upon  the  strength  of  such  statement,  the 
credit  man  may  reclaim  any  goods  in  the  stock  of  the  bank- 
rupt that  can  be  identified.     It  is  necessary  to  file  quickly  a 


SAFETY    APPLIANCES 


125 


notice  or  demand  upon  the  temporary  receiver  or  trustee  that 
such  goods  are  to  be  set  aside.  The  reason  for  haste  is  ap- 
parent, for  if  the  trustee  should  dispose  of  the  merchandise 
before  a  claim  has  been  made  on  him,  he  can  plead  that  the 
credit  man  or  his  house  was  guilty  of  negligence  in  proceed- 
ing to  recover.  If  such  notice  is  filed,  then  the  attorney  for 
the  shipper  or  vendor  files  a  petition  in  due  form  of  law, 
setting  forth  the  contentions  of  the  claimant,  and  quoting  in 
detail  such  false  statement.  To  this  is  attached  a  copy  of  the 
original  invoice  and  an  invoice  giving  the  value  of  the  goods 
identified  in  the  bankrupt's  stock.  When  the  case  is  de- 
cided by  the  referee  the  right  of  appeal  exists,  whereby  either 
side  may  carry  the  case  before  the  judge  upon  proper  cer- 
tification of  the  referee.  This  subject  of  reclamation  in 
bankruptcy  should  be  studied  by  the  credit  man,  and  when 
an  opportunity  presents  itself  he  should  follow  closely  the 
proceedings  of  his  lawyer  in  a  recovery  of  this  kind.  Many 
a  shipment  can  be  recovered  and  an  account  entirely  saved 
by  knowing  how  to  act,  and  act  quickly,  in  reclamation  pro- 
ceedings. 


CHAPTER    XII 
CREDIT   INSURANCE 

The  Function  of  Credit  Insurance 

Credit  insurance  is  a  provision  against  excessive  loss 
through  credit  sales.  It  is  to  be  noted  that  the  word  "exces- 
sive" is  a  very  significant  part  of  this  definition,  indicating 
unusual  losses  which,  while  supposedly  unavoidable,  run  the 
percentage  of  total  loss  to  an  abnormal  figure. 

Some  of  the  best  credit  men  set  aside  at  the  beginning 
of  every  year  a  certain  sum  of  money  as  a  maximum  allow- 
ance for  losses  on  bad  debts.  Such  sum  is  determined  by 
computing  the  average  percentage  of  loss  for  the  past  few 
years,  and  the  volume  of  sales  for  the  year  just  closed,  or 
the  estimated  volume  of  sales  for  the  coming  year.  The 
department  expects  a  loss  of,  say,  one  per  cent  on  the  total 
volume  of  sales,  and  provides  for  this  amount,  and  then 
endeavors  to  keep  the  losses  within  this  limit.  Ordinarily 
it  will  succeed  in  doing  this,  but  should  the  credit  man  en- 
counter unexpected  financial  troubles,  brought  about  by 
crop  failures,  floods,  or  other  natural  causes,  or  by  a  gen- 
eral panic,  his  losses  will  exceed  the  sum  set  aside.  In  such 
case,  however,  they  are  abnormal,  excessive,  extraordinary 
— losses  that  nothing  less  than  divine  foresight  could  pre- 
vent— and  it  is  to  provide  against  these  abnormal  losses  that 
credit  insurance  is  resorted  to. 

Suppose  the  losses  have  about  reached  the  one  per  cent 
limit,  and  that  near  the  end  of  the  year  two  or  three  of  the 
best  accounts  become  involved  through  unavoidable  casual- 
ties. Should  it  then  be  said  that  the  credit  man  has  failed  ? 
Such  criticism  would  be  ridiculous,  yet  the  house  has  suf- 

'     126 


CREDIT    INSURANCE  1 27 

fered  a  loss  in  excess  of  what  had  been  estimated  by  the 
credit  man,  and  its  dividends  are  curtailed.  The  credit 
man  is  not  to  blame,  nor  should  the  house  sustain  the  loss 
if  there  is  a  method  of  preventing  it.  Credit  insurance  is 
intended  to  provide  for  just  such  unavoidable  losses. 

Origin  and  Methods  of  Insurance 

When  a  small  group  of  merchants  gathered  around  the 
tables  in  Lloyd's  coffee-house,  in  the  sixteenth  century,  and 
agreed  with  each  other  to  share  the  losses  of  incoming  car- 
goes by  contributing  in  proportion  to  the  amount  of  goods 
each  had  afloat,  these  merchants,  unintentionally  perhaps, 
"invented"  insurance.  And  so  today  men  afford  protec- 
tion to  each  other  against  unlooked-for  casualties,  by  each 
paying  a  premium  into  the  general  fund.  The  sum  total 
of  these  premiums,  less  the  expense  of  collecting  and  carry- 
ing on  the  business,  constitutes  a  fund  out  of  which  losses 
are  paid.  The  insurance  company  is  the  agency  which  col- 
lects the  premiums  and  distributes  the  losses. 

The  soundness  and  legitimacy  of  the  general  principles 
of  insurance  are  not  questioned.  Life,  fire,  and  casualty  in- 
surance are  regarded  as  necessities.  Time  has  proved  the 
correctness  of  their  methods.  The  actuary  of  the  life  in- 
surance company  figures  from  tables  running  back  for  de- 
cades, and  determines  just  what  premium  to  charge  for 
insuring  the  life  of  an  individual  at  a  certain  age.  The 
fire  insurance  rating  bureau  fixes  a  certain  rate  on  a  dwell- 
ing, based  on  its  construction,  location,  or  use.  All  insur- 
ance, therefore,  is  based  on  the  law  of  averages,  and  in  all 
lines  of  insurance  the  principle  is  the  same.  A  considera- 
tion of  this  will  establish  the  reason  for  credit  insurance. 

Insurance  a  Precautionary  Measure 

The  merchant  insures  his  store  and  goods  against  fire, 


128       CREDIT    INFORMATION    AND    PROTECTION 

not  that  he  expects  them  to  burn,  but  to  obtain  their  value 
or  a  part  of  their  value  if  the  unexpected  should  happen. 
If  his  property  should  burn  without  such  protection,  not 
only  would  his  creditors  suffer,  but  he  would  probably  lose 
the  accumulated  earnings  of  a  lifetime.  Every  precaution 
is  ordinarily  taken  to  guard  against  fire,  even  though  in- 
surance is  carried.  A  man  may  carry  full  insurance  and 
recover  the  total  value  of  his  property,  but  he  still  sustains 
a  loss  through  the  disorganization  of  his  affairs.  It  is  not 
intended  that  he  shall  make  a  profit  when  he  burns  out ;  but 
only  that  he  and  his  creditors  shall  be  protected  against  ex- 
cessive loss. 

The  bulk  of  business  today  is  transacted  on  credit. 
What  greater  risk,  after  all,  could  the  manufacturer,  job- 
ber, or  merchant  take  when  he  scatters  broadcast  over  a 
wide  territory  many  thousands  of  dollars  of  his  assets  in 
the  shape  of  merchandise  shipped  to  other  merchants  on 
whom  he  relies  for  payment?  The  merchant  in  this  day 
of  sharp  competition  must  know  his  costs  and  expenses. 
Assuming  that  his  cost  calculations  are  correct  and  that  he 
has  obtained  the  required  margin  of  profit,  his  success  would 
be  assured  but  for  the  one  item  that  he  has  not  guarded 
against — the  unexpected  loss. 

He  has  insured  his  buildings,  his  merchandise,  and  his 
life;  he  has  bonded  his  employees  against  theft;  he  has 
taken  out  sprinkler  insurance,  liability  insurance,  plate-glass, 
and  even  tornado  insurance;  yet  he  tosses  on  his  bed  at 
night  and  thinks  of  the  thousands  of  dollars  of  his  assets 
which  his  credit  man  has  distributed  among  strangers,  re- 
lying on  their  ability  and  integrity,  and  willingness  to  pay 
if  not  overtaken  by  unexpected  misfortune.  He  knows 
that  he  will  sustain  some  losses;  in  fact,  he  is  willing  to 
take  some  chances  in  order  to  build  up  a  business.  But 
what  if  the  credit  man  has  erred  in  judgment  many  times, 


CREDIT    INSURANCE  129 

instead  of  a  few  times?  What  of  the  unexpected  losses? 
The  solution  of  the  question,  and  the  only  solace  for  his 
troubled  spirit  is  the  insurance  of  these  credits  by  a  credit 
indemnity  company. 

Scope  of  Credit  Insurance 

Credit  insurance  is  sometimes  compared  to  the  indorse- 
ment on  a  note,  or  to  the  collateral  that  a  bank  takes 
against  a  loan;  but  the  indemnity  company  does  not  guar- 
antee the  payment  of  every  loss,  any  more  than  a  fire  in- 
surance company  would  pay  more  than  the  face  of  its  policy 
simply  to  reimburse  the  owner  of  a  house  and  make  him 
whole  against  a  total  loss.  While  credit  insurance  is  a  col- 
lateral against  outstanding  accounts,  it  is  a  collateral  only 
for  so  much  of  these  accounts  as  is  beyond  the  share  that 
is  just  and  right  for  the  policy  owner  himself  to  carry — 
just  as  a  bank  must  first  exhaust  its  efforts  to  collect  from 
the  maker  of  the  note  before  proceeding  against  the  en- 
dorser. Some  initial  loss  must  be  expected,  and  it  is  only 
against  the  excess  losses  that  the  indemnity  company  af- 
fords protection  to  the  policy  holder. 

Work  of  the  Credit  Insurance  Agent 

In  negotiating  for  credit  insurance  the  agent  deter- 
mines, first,  the  normal  loss  which  the  house  itself  must 
sustain  before  the  insurance  company  is  called  upon;  and 
second,  he  determines  the  rate  per  cent  per  annum  to  be 
paid  for  the  insurance,  as  well  as  the  size  of  the  bond,  or 
the  fixed  limit  of  indemnification;  third,  he  computes  the 
premium'  to  be  paid,  which  is  a  mere  matter  of  arithmetic 
after  the  former  factors  have  been  determined. 

As  has  already  been  explained,  net  losses  for  several 
years  back  are  compared  with  the  volume  of  sales  for  each 
of  those  years  in  order  to  determine  the  average  percent- 


I30 


CREDIT    INFORMATION    AND    PROTECTION 


age  of  loss  as  a  basis  for  calculation  in  fixing  the  initial 
loss.  It  is  to  be  expected  that  every  wholesale  house  will 
endeavor  to  increase  its  business  from  year  to  year,  and  if 
the  house  is  enlarging  its  territory  and  increasing  its  cred- 
its, such  facts  must  be  considered  in  establishing  the  rate 
of  the  initial  loss  for  the  coming  year,  which  is  to  be  cov- 
ered by  the  bond.  It  is  also  taken  into  consideration  that 
the  house  already  has  on  its  books  a  considerable  aggre- 
gate of  accounts  in  all  stages  of  maturity,  and,  if  these 
accounts  are  to  be  covered  in  the  bond,  allowances  must 
be  made  whereby  they  are  to  stand  their  share  in  the  initial 
loss. 

After  considering  these  premises,  assume  that  it  is 
agreed  between  the  credit  insurance  company  and  the  client 
that  one  per  cent  on  all  outstanding  credits  and  sales  for 
the  year  will  be  a  fair  rate  for  reckoning  the  initial  loss. 
This  means  that  on  a  total  of  $500,000  involved,  the  house 
must  stand  a  loss  of  $5,000  before  any  liability  accrues 
against  the  credit  insurance  company — subject,  of  course, 
to  the  limitations  which  will  be  explained  later. 

For  fixing  the  rate  of  premium,  the  indemnity  com- 
pany furnishes  its  agent  with  a  schedule  of  rates  for  each 
class  of  business  transacted.  Through  many  years  of  in- 
vestigations the  mercantile  agencies  have  accumulated  ex- 
tensive data  concerning  failures  in  every  class  of  business, 
the  number  of  such  failures,  and  the  amounts  involved, 
their  geographical  location,  the  causes,  and  the  general 
commercial  conditions  under  which  they  occurred;  and 
such  data  are  tabulated  in  a  manner  similar  to  mortality 
records  of  fire  losses.  From  these  tables  are  obtained  fig- 
ures that  determine  the  commercial  mortality  and  the  aver- 
age losses  in  every  class  of  business ;  such,  for  instance,  as 
clothing  stores,  general  merchandise  stores,  hardware 
stores,  millinery  or  department  stores,  etc.     As  these  fig- 


CREDIT    INSURANCE 


131 


ures  are  based  on  computations  running  over  a  great  num- 
ber of  years,  they  are  quite  as  accurate  as  fire  insurance 
data,  and  a  dependable  rate  is  computed  for  each  class  of 
business. 

Through  an  investigation  of  the  prospective  insurer's 
books,  the  credit  insurance  agent  considers  the  class  of  cus- 
tomers, the  volume  of  business,  the  size  of  the  accounts, 
and  the  general  credit  policy  of  the  house.  The  size  of  the 
bond  or  fixed  amount  of  indemnity  is  then  determined; 
for  example,  on  a  business  of  $500,000  per  annum  it  is 
perhaps  agreed  that  the  credit  insurance  company  will  be 
responsible  for  all  losses  over  and  above  the  initial  loss  of 
one  per  cent  up  to  an  amount  of  $10,000,  subject  to  the 
limitations  of  the  bond. 

Having  determined  the  rate  and  amount,  and  agreed 
upon  the  initial  loss  of  $5,000,  it  is  now  in  order  to  dis- 
cuss the  various  limitations  which  are  fixed  by  the  terms 
of  the  bond  itself. 

Limitations  of  the  Insurance  Bond 

The  first  consideration  is  the  ratings  of  the  customers 
of  the  house,  for  both  capital  and  credit,  in  the  rating  books 
of  Dun  and  Bradstreet.  These  customers  are  divided  into 
two  classes:  (i)  "rated,"  that  is,  those  having  a  capital 
rating  followed  by  a  first  or  second  credit  rating,  and  (2) 
''ofT-rated,"  or  those  having  a  lower  credit  rating  than 
the  former,  and  no  capital  rating,  or  else  no  ratings  at  all. 
Statistics  show  that  the  greatest  commercial  mortality 
exists  in  the  off-rated  class  of  accounts.  Therefore,  the 
indemnity  company  sets  a  limit  to  its  liability  on  these  ofY- 
rated  accounts,  and  stipulates  that  only  a  certain  percent- 
age of  the  bond  shall  apply  to  such  accounts  when  figuring 
the  total  losses  for  the  year.  For  example,  suppose  that 
on  the  bond  mentioned  above,  the  limit  on  any  ofY-rated 


132       CREDIT    INFORMATION    AND    PROTECTION 

account  is  fixed  at  75  per  cent  of  $500,  and  that  the  total 
losses  on  off-rated  accounts  shall  be  but  40  per  cent  of  the 
total  bond,  or  $4,000  on  the  $10,000  bond.  On  the  rated 
accounts  the  bond  pays  indemnity  at  the  full  rate  up  to  an 
agreed  percentage  of  the  capital  rating. 

A  great  many  people  misunderstand  the  purport  of  the 
bond,  supposing  that  it  assures  them  against  all  loss  on 
each  particular  account,  even  above  the  amount  fixed.  This 
would  be  manifestly  unfair,  for  the  reason  that  while  some 
credit  men  fix  a  limit  on  the  amount  they  will  sell  to  any 
one  account,  agreeing  generally  that  a  safe  limit  is  10 
per  cent  of  the  capital  rating,  the  great  majority  of  credit 
men  ship  an  account  all  that  they  think  it  will  pay  for, 
without  regard  to  any  fixed  limit.  Now,  where  a  bond  is 
intended  to  cover  the  excessive  losses,  it  is  meant  to  cover 
the  total  losses  on  all  the  accounts,  up  to  the  limit  of  the 
bond.  For  example,  in  the  case  of  the  bond  already  in- 
stanced, there  might  be  a  loss  on  one  account  of  $1,000, 
and  losses  on  twenty  other  accounts  in  various  sums  aggre- 
gating $3,500,  making  the  total  loss  $4,500.  There 
would  in  this  case  be  no  recovery  on  the  bond,  because  the 
total  of  the  losses  is  $500  less  than  the  initial  loss  of  $5,000 
which  the  house  itself  is  to  stand.  Suppose,  however,  that 
instead  of  the  $1,000  loss,  there  was  a  loss  of  $3,000  on  a 
well-rated  concern,  then  the  total  of  losses  would  aggre- 
gate $6,500,  or  $1,500  more  than  the  initial  loss,  and  there 
would  be  a  claims  to  this  extent  under  the  bond.  If,  how- 
ever, in  the  twenty  losses  mentioned  there  were  as  many 
as  fifteen  off-rated  accounts,  and  there  was  a  stated  limit 
of  $400  loss  on  each  one,  and  some  of  these  losses  exceeded 
such  limit,  then  the  adjuster  would  compute  the  losses, 
only  up  to  the  limit  of  $400  in  each  case. 

The  theory  of  these  provisions  of  credit  insurance  is 
that  in  taking  chances  contrary  to  the  law  of  averages  as 


CREDIT    INSURANCE  133 

shown  by  the  statistics,  the  bondholder  should  be  required 
to  stand  his  share  of  such  losses  and  become  a  coinsurer 
on  his  own  risks.  This  explanation  is  made  because  a 
great  deal  of  criticism  against  the  credit  insurance  com- 
panies is  sometimes  aroused  over  the  final  adjustment. 
Such  criticism  is  wholly  unwarranted  and  brought  about 
solely  because  the  bondholder  has  never  studied  the  terms 
of  his  bond.  Credit  insurance,  for  some  reason,  is  not  gen- 
erally understood;  but  with  reasonable  study  it  is  as  easily 
grasped  as  any  other  class  of  insurance,  and  the  subject 
should  be  given  due  consideration  by  every  credit  man. 

A  Wrong  View  of  Credit  Insurance 

An  enthusiastic  agent  may  claim  for  credit  insurance 
that  it  gives  a  feeling  of  safety  to  the  credit  man;  that 
under  it  he  can  extend  the  business  of  his  concern,  and 
take  risks  that  he  would  not  otherwise  venture  upon;  that 
when  he  has  a  risk  before  him  to  pass  on,  which  is  well 
rated  but  bears  all  the  earmarks  of  danger,  he  can  go 
straight  ahead  and  ship  his  bill,  feeling  sure  that  the  credit 
indemnity  company  will  take  care  of  the  loss.  Such  rea- 
soning is  all  wrong.  There  is  never  any  excuse  for  know- 
ingly and,  one  might  also  say,  maliciously,  extending  credit 
that  the  credit  man  knows  is  hazardous.  He  may  be  fully 
covered  under  his  bond,  and  the  indemnity  company  be 
forced  to  pay  without  question,  but  common  honesty  for- 
bids such  a  credit,  just  as  an  honest  merchant  would  not 
allow  his  store  to  burn  in  order  to  collect  his  insurance. 
Wild  and  foolish  credit-granting  is  never  permissible.  The 
credit  man  who  is  working  conscientiously  on  a  liberal  pol- 
icy must  take  some  risks,  but  he  does  so  with  the  expecta- 
tion of  collecting  before  the  day  of  trouble.  On  the  books 
of  nearly  every  concern  are  numbers  of  risks  more  or  less 
hazardous,  but  most  of  these  turn  out  eventually  to  be 


134 


CREDIT    INFORMATION    AND    PROTECTION 


good,  and  they  are  not  entered  into  with  the  expectation 
of  "cashing  in"  through  the  credit  insurance  company. 

The  credit  man  should  avoid  risks  which  he  knows  are 
not  worthy  of  being  shipped,  regardless  of  his  insurance. 
There  is  no  sense  in  trying  to  make  money  out  of  a  credit 
insurance  bond,  any  more  than  in  trying  to  get  ahead  of 
the  fire  insurance  company.  The  fact  should  always  be 
kept  in  mind  that  insurance  is  a  protection  and  not  a 
money-making  scheme. 

Advantages  of  Credit  Insurance 

Suppose  an  unforeseen  and  unavoidable  misfortune 
happens  to  a  good  customer  whereby  a  heavy  loss  is  sus- 
tained by  the  house.  Ordinarily,  the  credit  man  would 
adopt  a  policy  of  contraction,  pulling  down  on  every  ac- 
count on  his  books.  He  has  a  big  loss  on  hand,  and  if 
losses  keep  on  piling  up  even  in  small  amounts  he  will  run 
far  beyond  the  limit  allowed  by  the  executive  under  whom 
he  is  working.  If,  however,  there  is  a  credit  bond  in  force, 
he  need  not  become  panic  stricken  over  the  one  loss.  He 
is  not  to  blame,  since  the  loss  was  not  caused  through  any 
error  of  judgment  on  his  part,  and  a  sudden  contraction 
in  his  credits  which  will  inevitably  work  harm  to  the  house, 
is  not  necessary.  He  should  not  lose  his  head  in  such  a 
case,  but  should  continue  his  usual  policy — if  he  is  sure  it 
is  the  correct  one — and  at  the  end  of  the  year,  if  the  big 
loss  runs  up  his  total  beyond  the  specified  initial  loss,  the 
bonding  company  pays  the  excess. 

Another  advantage  of  the  policy  is  its  tendency  to  make 
the  credit  man  keep  in  close  touch  with  his  accounts.  He 
pays  more  attention  to  the  ratings  at  each  succeeding  ship- 
ment, in  order  to  see  that  he  is  within  the  provisions  of 
his  bond.  Above  all,  he  learns  to  pay  strict  attention  to 
any  changes  in  capital  or  credit  rating.    He  takes  more  in- 


CREDIT    INSURANCE 


135 


terest  in  the  commercial  reports,  and  checks  up  each  one 
carefully  to  see  if  the  agency  is  rating  correctly.  He  also 
watches  the  ledger  accounts  because  the  bond  only  covers 
each  account  up  to  a  certain  amount.  In  the  initial  loss, 
which  stands  before  him  like  a  signpost,  he  finds  some- 
thing to  work  against.  The  good  credit  man  tries  to  ship 
all  he  can  and  keep  his  losses  down  to  a  minimum.  If  he 
can  hold  these  losses  well  under  the  figure  set  for  the  initial 
loss  he  can  feel  justly  proud,  because  this  initial  loss  is  the 
average  for  all  houses  of  his  class.  By  such  good  work 
he  has  a  chance  to  lower  the  figures  on  his  initial  loss  and 
procure  a  better  rate  on  a  subsequent  bond. 

A  False  Objection  to  Credit  Insurance 

One  of  the  arguments  against  credit  insurance  claims 
that  in  a  sense  it  "takes  the  head  off  the  credit  man's 
shoulders."  By  this  is  meant  that  the  bond  fixes  the  limit 
of  losses  on  the  accounts  and  prescribes  certain  limitations 
in  regard  to  handling  such  accounts.  Adherents  to  this 
theory  hold  that  even  the  bookkeeper  is  competent  to  pass 
on  credits  by  keeping  the  terms  of  the  bond  before  him  and 
shipping  only  such  accounts  and  to  such  extents  as  are 
within  the  limits. 

If  such  a  policy  were  practicable  in  any  sense,  there 
might  be  some  truth  back  of  this  argument,  but  the  policy 
is  not  practicable  and  the  argument  is  fallacious.  For  illus- 
tration, suppose  the  insurance  company  giving  the  bond 
has  adopted  Dun  as  a  basis  on  which  to  prescribe  the  limits 
to  ratings.  There  is  an  order  from  a  party  rated  "blank- 
blank"  by  Dun,  but  rated  "T.  C."  by  Bradstreet,  while  the 
Credit  Clearing  House  shows  twenty  comments,  all  of 
which  are  good  and  some  even  discounting.  Further  in- 
vestigation of  the  Dun  report  shows  that  the  customer  has 
repeatedly  refused  to  give  out  any  information  regarding 


136       CREDIT    INFORMATION    AND    PROTECTION 

his  business,  and  that  since  no  first-hand  information  could 
be  obtained  sufficient  to  justify  a  rating,  such  rating  has 
been  withheld.  To  answer  this,  one  has  only  to  consider 
how  statements  are  obtained  by  the  agencies.  In  this  case, 
for  instance,  the  reporter  for  Dun  might  have  been  refused 
information,  and  the  local  Dun  attorney,  not  being  friendly 
to  the  customer,  could  not  bring  influence  to  bear  to  assist 
in  obtaining  a  statement.  Possibly  the  reporter  for  Brad- 
street  had  also  been  turned  down;  but  the  Bradstreet  attor- 
ney, being  the  local  counsel  for  this  customer,  brought  his 
influence  to  bear  so  that  the  Bradstreet  reporter  was  put 
in  possession  of  a  statement.  Under  such  circumstances 
both  ratings  might  be  justified.  The  commercial  agencies 
go  to  great  pains  and  expense  to  rate  justly,  and  while  they 
may  be  correct  in  withholding  a  rating,  it  happens  many 
times  that  the  unrated  subject  is  not  utterly  unworthy  of 
confidence. 

Under  these  conditions,  if  a  house  should  adopt  a  policy 
of  blindly  following  the  ratings  in  the  books — which  are  not 
guaranteed  by  the  agencies — it  would  have  no  need  for  a 
credit  man,  and  it  would  probably  not  make  much  of  a  suc- 
cess of  its  business.  At  the  same  time  it  must  be  admitted 
that  the  plan  of  the  credit  indemnity  companies  in  basing 
their  insurance  figures  on  ratings  is  scientific  and  correct; 
for  their  statistics  are  based  on  millions  of  ratings  and  not 
simply  on  a  few  scattered  cases.  The  few  thousand  cus- 
tomers on  the  books  of  a  wholesale  house  are  infinitesimal 
as  compared  with  the  business  of  the  entire  country. 

The  Credit  Man  Indispensable 

In  the  case  above  cited,  the  credit  man  would  use  his 
judgment  and  probably  ship  the  customer,  just  as  he  would 
turn  him  down  even  if  he  had  a  high  rating  in  one  agency, 
but  was  unfavorably  reported  by  the  other  agencies.    Credit 


CREDIT    INSURANCE  1 37 

insurance  is  based  on  averages  and  not  on  isolated  cases; 
and  the  credit  insurance  company  demands  above  all  things 
that  the  holder  of  a  bond  employ  a  thoroughly  competent 
credit  man  to  sift  the  chaff  from  the  wheat. 

If  the  weak  credit  man  keeps  the  bond  constantly  before 
him  and  is  afraid  to  use  his  common  sense,  the  chances  are 
that  he  will  grow  weaker  and  the  bond  will  be  a  detriment 
to  him  and  to  the  house  for  which  he  is  working.  Suppose 
a  department  store  crowded  with  merchandise  should  refuse 
to  decorate  for  Christmas  because  of  the  extra  fire  hazard 
occasioned  by  the  decorations.  It  would  lose  the  Christ- 
mas trade  and  likely  the  good  will  of  many  of  its  customers. 
The  progressive  department  store  early  in  the  fall  procures 
quantities  of  fireproofed  decorations,  puts  in  additional  port- 
able extinguishers,  redoubles  its  ordinary  fire  precautions, 
and  puts  an  extra  watchman  on  every  floor.  The  sane, 
safe  credit  man  uses  his  brains,  investigates  every  risk, 
watches  the  limitations  on  his  bond,  and  disregards  such 
limitations  if  he  thinks  the  facts  warrant  his  doing  so.  He 
takes  all  precautions  against  extra  hazards,  just  as  the  de- 
partment store  provides  against  the  fire  hazard.  In  the 
majority  of  cases  he  will  find  that  he  is  correct  in  judgment ; 
but  when  he  misses  in  judgment — as  any  man  will  do  oc- 
casionally— he  makes  up  for  it  in  his  ability  as  a  collector 
and  in  watching  the  account  after  it  is  on  his  books. 

Credit  Insurance  and  Fire  Insurance 

Some  will  say  that  credit  insurance  is  not  like  fire 
insurance  because  it  divides  its  policy  holders  into  classes 
based  on  the  kind  of  business  engaged  in ;  whereas  the  fire 
insurance  company  rates  each  risk  on  its  individual  features 
of  construction,  exposure,  goods,  or  the  nature  of  business 
conducted.  Credit  insurance  goes  quite  as  far  and  really 
digs  deeper  into  the  subject  by  placing  each  risk  on  its 


138       CREDIT    INFORMATION    AND    PROTECTION 

individual  merits.  In  addition  to  working  along  the  general 
line  of  averages  as  applied  to  a  certain  class  of  business,  the 
credit  insurance  company  applies  the  same  .rule  to  its  cus- 
tomers and  their  ratings.  It  considers  not  only  the  business 
itself,  but  the  policy  of  the  house,  the  moral  hazard,  and  the 
ability  and  efficiency  of  the  credit  office. 

Credit  insurance  is  yet  in  its  infancy,  and  it  is  probable 
that  it  will  be  developed  to  a  wonderful  extent.  The  basic 
principles  are  correct,  and  experience  has  demonstrated  that 
it  has  a  legitimate  reason  for  its  existence. 


CHAPTER    XIII 

INCIDENTAL  PROBLEMS  OF  THE  CREDIT  MAN 

Credit  Diplomacy 

The  duties  of  a  credit  man  extend  not  merely  to  the 
granting  of  credit  and  the  collection  of  accounts;  but 
through  the  exercise  of  these  functions  he  helps  to  shape 
the  policy  of  the  house  toward  its  customers,  particularly  in 
such  matters  as  touch  upon  its  accounts.  Some  of  the  prob- 
lems arising  from  bad  or  unbusinesslike  practices  on  the  part 
of  customers,  and  which  directly  affect  the  book  accounts, 
are  the  following : 

1.  Failure  to  pay  interest  where  accounts  have  run  past 

maturity. 

2.  Taking  excessive  or  unjust  discounts. 

3.  Making  unjust  claims. 

4.  Returning  merchandise. 

5.  Cancellations. 

It  is  in  the  handling  of  such  problems  that  the  credit 
man  may  display  ability  of  a  high  character,  or,  through  in- 
capacity to  grasp  the  situation  and  handle  it  successfully, 
may  become  a  mere  follower  of  routine.  Tact,  diplomacy, 
firmness  of  character,  and  broad-mindedness  are  essential 
in  handling  such  problems,  and,  since  their  adjustments  are 
usually  made  through  correspondence,  tactful,  forceful  letter 
writing  is  also  required.  The  writer  should  be  absolutely 
convinced  of  the  justice  of  his  contention  and  the  strength 
of  his  position  before  he  undertakes  to  convince  an  erring 
customer.  But  he  must  also  bear  in  mind  that  it  costs 
money  to  put  a  new  customer  on  the  books,  and  it  is  better 

139 


I40 


CREDIT    INFORMATION    AND    PROTECTION 


to  save  one  old  customer  whose  credit  is  firmly  established, 
than  to  search  for  two  new  ones  of  whom  nothing  is  known. 
The  average  merchant  is  reasonable  and  honest;  and  the 
credit  man  who  can  read  character  will  know  how  to  ap- 
proach an  individual  and  set  any  question  before  him  in 
such  a  manner  as  to  show  the  right  and  wrong  of  the  con- 
troversy, and  do  this  so  pleasantly  as  not  to  cause  offense. 

1.     Failure  to  Pay  Interest 

When  an  account  is  allowed  to  run  past  maturity,  in- 
terest should  be  charged,  not  only  from  the  standpoint  of 
business  common  sense  but  as  a  matter  of  principle.  The 
wholesale  house  in  planning  its  financial  policy  allots  a  cer- 
tain proportion  of  its  capital  to  merchandise,  another  amount 
to  accounts  receivable,  and  so  on  through  the  list  of  its 
necessary  requirements.  If  accounts  are  met  promptly  at 
maturity,  borrowing  is  not  necessary;  but  if  through  over- 
buying the  stock  increases  beyond  its  quota,  or  if  through 
slowness  of  collections  the  accounts  receivable  exceed  their 
limit,  the  business  becomes  a  borrower  from  its  banker,  and 
it  pays  interest  on  the  money  it  borrows. 

When  the  customer  goes  to  his  bank  and  borrows,  he 
thinks  it  entirely  right  and  proper  for  his  banker  to  charge 
him  bank  discount,  which  is  interest  in  advance.  This, 
then,  is  an  argument  to  lay  before  the  customer  who  refuses 
to  pay  interest  on  open  accounts  running  beyond  maturity, 
since  in  this  case  the  merchant  is  merely  acting  as  his 
customer's  banker. 

Again,  the  wholesale  house  carries  the  customer  past 
maturity  as  an  act  of  courtesy,  and,  in  consideration  of  such 
courtesy,  the  merchant  should  look  upon  the  interest  as  a 
moral  obligation.  But  the  customer  may  argue :  "I  showed 
you  a  favor  in  buying  my  goods  of  you,  and  therefore  I 
am  justly  entitled  to  reciprocal  courtesy,  and  I  won't  pay 


PROBLEMS    OF    THE    CREDIT    MAN 


141 


interest  on  an  open  account  when  it  runs  past  due."  The 
answer  to  this  would  be  that  the  jobber  is  selHng  goods,  not 
time  or  terms,  and,  beyond  this,  that  he  has  put  the  full 
value  into  the  goods  themselves,  and  is  therefore  under  no 
obligations  to  anyi  customer  for  the  mere  purchase  of  his 
goods,  as  the  prices  and  quality  are  of  themselves  sufficient 
inducements.  This  contention  might  be  amplified,  and 
many  other  arguments  pecuHar  to  each  line  of  business  will 
undoubtedly  suggest  themselves  to  the  credit  man. 

Such  lengthy  arguments  are,  of  course,  intended  for 
smaller  or  more  unbusinesslike  merchants.  Commission 
houses  and  brokers  are  able  to  collect  interest  from  large 
buyers,  and  notify  them  by  printed  stickers  attached  to  their 
invoices  that  they  expect  to  do  so.  The  great  volume  of 
business  in  this  country  is,  however,  done  through  the  job- 
bers who  sell  and  often  carry  the  small  merchants.  Such 
retail  merchants  must  be  taught,  and  the  fact  must  be  im- 
pressed upon  them  that  interest  after  maturity  is  just  as 
much  a  part  of  the  obligation  as  the  principal  itself.  It  is 
folly  to  say  that  a  house  should  not  sell  a  merchant  who  is 
slow  pay.  It  should  rather  be  said  that  if  the  slow-paying 
customer  cannot  be  educated  into  paying  promptly,  or  if  he 
lives  in  one  of  the  great  agricultural  sections  where  he  can- 
not pay  promptly,  then  he  should  be  educated  to  pay  interest. 
The  plan  usually  adopted  is  to  close  the  open  account,  when 
due,  by  a  note.  All  the  states  recognize  the  right  to  collect 
interest  on  notes,  yet  very  few  make  interest  on  an  open 
account  a  legal  obligation. 

2.    Excessive  or  Unjust  Discounts 

Discount  is  a  reward  for  payment  within  a  specified 
limit  of  time.  It  is  not,  as  some  suppose,  interest  on  money, 
nor  is  it  merely  a  trade  allowance.  Therefore,  cash  discount, 
strictly  speaking,  is  earned  by  the  customer  only  when  his  re- 


142 


CREDIT    INFORMATION    AND    PROTECTION 


mittance  reaches  the  office  of  the  seller  before  the  expiration 
of.  the  time  limit.  The  rate  of  discount,  if  clearly  expressed 
in  the  terms  on  the  invoice,  governs  the  amount  to  be  de- 
ducted. Any  deviation  from  the  prescribed  manner  of  settle- 
ment is  a  violation  of  the  contract  between  buyer  and  seller, 
and  the  credit  man  should  so  regard  it.  Knowing  the  gen- 
eral principle,  individual  cases  can  be  handled  on  their  re- 
spective merits. 

On  a  question  of  excessive  deductions  the  credit  man 
should  adopt  a  firm  attitude  and  stand  positively  upon  his 
rights.  It  is  poor  policy  to  allow  a  customer  to  override 
the  house  by  deliberately  making  deductions  to  which  he  is 
not  entitled.  Where  the  terms  of  sale  are  clearly  outlined 
and  definitely  understood  at  the  time  the  sale  is  made,  there 
can  be  no  excuse  for  this  practice.  Before  handling  such  a 
case  the  credit  man  should  have  placed  before  him  the 
original  order  and  any  correspondence  bearing  on  that  order, 
from  either  customer  or  salesman,  and  particularly  the 
latter;  for  a  too  zealous  salesman  sometimes  offers  terms 
and  discounts  that  are  not  expressed  on  the  order  sheet. 
After  considering  the  facts  and  establishing  the  security  of 
his  position,  the  credit  man  proceeds  to  outline  the  policy  of 
the  house,  firmly  but  courteously,  and  follows  the  matter 
up  until  settlement  is  effected.  It  is  unfortunate  that  differ- 
ent classes  of  merchandise  often  carry  widely  varying  rates 
of  discount,  but  this  is  one  of  the  results  of  the  complex 
system  on  which  business  in  the  United  States  is  conducted 
— a  system  which  differs  materially  from  the  systems  in 
operation  in  foreign  countries. 

The  question  of  the  entire  elimination  of  cash  discount 
has  been  agitated  among  credit  men  for  some  years  and  the 
idea  is  constantly  gaining  favor.  With  the  continual  in- 
crease in  the  cost  of  doing  business  and  the  consequent 
shortening  of  margins  of  profit,  it  is  necessary  that  both  the 


PROBLEMS  OF  THE  CREDIT  MAN 


143" 


rate  of  discount  and  the  time  allowed  for  a  bill  to  run  should 
be  cut  down.  It  is  barely  possible  that  this  may  lead  to  an 
eventual  elimination  of  the  open  account  system — a  dis- 
tinctively American  institution — and  to  the  closing  of  ac- 
counts into  notes  or  acceptances.  This  latter  idea  is 
especially  to  be  favored  where  the  time  of  a  bill  exceeds 
thirty  days.  Under  the  favoring  provisions  of  the  Federal 
Reserve  Banking  Law,  such  paper  should  prove  very  popular 
with  the  banks. 

3.     Unjust  Claims 

Unjust  claims  should  be  handled  in  a  manner  similar  to 
unjust  discounts.  Claims  arise  through  the  tortuous  work- 
ings of  the  human  intellect,  and  their  name  is  therefore 
Legion.  No  man  knoweth  when  or  how  claims  may  arise. 
The  most  aggravating  of  these  is  shortage — the  favorite 
claim  of  the  small  merchant  and  the  only  one  to  be  discussed 
here. 

Wholesale  houses  at  present  follow  a  system  of  checking 
through  an  order  from  stock  to  shipping  room  and  then  into 
the  shipping  cases,  which  practically  eliminates  any  chance 
for  shortage  in  a  shipment.  The  house  is  therefore  able  to 
furnish  readily  an  affidavit  setting  forth  the  material  facts 
of  checking  and  packing.  The  receiving  merchant  also 
should  be  prepared  to  make  the  necessary  affidavit  that  the 
specified  shortage  occurred,  and  this  practically  forces  upon 
the  carrier  the  burden  of  proving  that  the  shipment  was  not 
robbed  in  transit.  The  transportation  companies  usually 
give  such  matters  careful  attention,  particularly  if  the  con- 
signee has  had  the  package  examined  by  an  employee  of  the 
transportation  company  when  the  shortage  appeared  and 
before  the  shipment  itself  was  placed  in  stock. 

One  of  the  duties  devolving  upon  the  credit  man,  from 
an  ethical  and  humanitarian  standpoint,  is  that  of  educating 


144 


CREDIT    INFORMATION    AND    PROTECTION 


the  small  merchant  in  matters  pertaining  to  the  conduct  of 
his  business  along  the  line  of  good  practice.  Therefore,  the 
proper  handHng  of  claims  against  a  transportation  company, 
whether  for  shortage  in  shipment,  loss  and  damage,  con- 
cealed damage,  overcharge  in  freight,  or  overweight,  can 
be  explained  to  the  customer  in  such  a  way  that  untold  worry 
and  annoyance  to  all  parties  concerned  may  be  eliminated. 

4.    Returned  Merchandise 

The  unjust  and  arbitrary  return  of  merchandise  is  one 
of  the  most  disagreeable  matters  that  come  before  the  credit 
man.  Returns  without  good  reason  may  be  classed  as 
arbitrary  and  unjust,  because  the  customer  should  know, 
when  buying  the  merchandise,  (a)  that  it  is  adapted  to  his 
business;  (b)  that  his  stock  of  such  goods  warrants  the 
purchase;  (c)  that  he  can  see  his  way  clear  to  dispose  of 
the  stock.  The  lack  of  foresight  in  one  or  more  of  these 
particulars  is  the  principal  cause  of  returns. 

The  clearance  reports  will  indicate  whether  a  merchant 
is  disposed  to  follow  the  practice  of  returning  goods.  He 
should  not  be  allowed  arbitrarily  to  return  goods,  particu- 
larly if  his  record  indicates  that  he  has  been  guilty  of  such 
practices  in  the  past.  The  credit  man  owes  it  to  his  house, 
and  to  the  wholesale  world  generally,  to  take  a  firm'  stand 
against  such  abuses.  When  once  a  merchant  finds  that  a 
house  will  condone  such  an  offense,  he  becomes  more  free 
in  his  buying  and  more  careless  in  his  selections.  He 
naturally  feels  that  he  can  place  the  goods  on  display  and, 
if  they  do  not  sell,  can  return  what  is  unsold  to  the  whole- 
sale house. 

On  the  other  hand,  there  are  cases  without  number  where 
the  shipper  is  at  fault,  such  as  in  substitutions,  goods  not 
being  delivered  according  to  sample,  delayed  shipments,  etc. 
In  most  cases,  adjustments  are  easily  made.     Also,  cases 


PROBLEMS    OF    THE    CREDIT    MAN  145 

often  arise  where  a  merchant  buys  with  care  but  his  cal- 
culations are  set  at  naught  through  failure  of  crops  or  other 
unforeseen  adversity,  and  it  becomes  necessary  for  him  to 
return  merchandise.  Such  cases  should  be  handled  with 
tact  and  on  their  individual  merits  as  sound  common  sense 
may  dictate. 

5.     Cancellations 

Cancellations  of  orders,  especially  in  the  manufacturing 
trade,  are  as  annoying  as,  and  often  more  troublesome  than, 
the  returning  of  merchandise;  although  both  abuses  are  of 
similar  nature.  There  are  important  court  decisions  in  many 
states  on  the  cancellation  of  orders;  and  as  these  are  well 
known  to  every  good  lawyer,  it  might  be  well  for  the  credit 
man  to  obtain  information  on,  and  study,  the  law  involving 
contracts,  and  thoroughly  familiarize  himself  with  the  court 
rulings.  All  blanks  used  by  salesmen  in  taking  orders  for 
future  shipment,  especially  where  the  merchandise  is  made 
according  to  specifications  of  the  buyer,  should  have  printed 
on  them  a  clause  to  the  effect  that  such  order  is  not  subject 
to  countermand  after  a  specified  date,  nor  subject  to  can- 
cellation after  work  on  it  has  started.  The  cancellation 
agreement  can  be  eliminated  if  desired ;  but  in  order  to  pre- 
serve the  equity  of  the  contract,  when  the  cancellation  clause 
is  retained,  a  clause  should  also  appear  binding  the  mill  to 
deliver  after  approval,  except  upon  certain  conditions  beyond 
the  ordinary. 

Effect  of  Trade  Abuses  on  Credit  Standing 

In  order  to  understand  what  relations  trade  abuses  bear 
to  the  credit  standing  of  customers,  it  is  only  necessary  to 
study  the  causes  of  failures  and  then  to  read  intelligently  the 
records  of  merchants  for  some  time  preceding  their  failures. 
Very  few  merchants  are  slow  pay  out  of  deliberate  mean- 


146       CREDIT    INFORMATION    AND    PROTECTION 

ness;  nor  does  a  merchant  become  guilty  of  various  trade 
abuses  out  of  malice.  Back  of  all  lies  the  one  great  reason 
— want  of  sufficient  funds.  If  various  trade  abuses  are 
shown  on  a  clearance  report,  it  is  an  unmistakable  sign  of 
financial  weakness.  Slow  and  unsatisfactory  settlements  are 
also  further  indications;  and  when  the  record  shows  that 
claims  are  reaching  the  hands  of  attorneys,  it  is  time  for 
the  credit  man  to  get  from  under  the  risk  as  quickly  as 
possible.  He  is  unwise  in  thinking  that  because  he  has 
escaped  so  far,  the  fear  is  foolish.  If  only  one  or  possibly 
two  trade  abuses  appear  in  a  lengthy  report,  there  might  be 
some  just  grounds  for  the  merchant's  asking  for  credit ;  but 
if  a  number  of  such  comments  appear,  then  it  stands  to 
reason  that  all  of  the  houses  making  comment  in  the  report 
cannot  be  wrong.  The  preponderance  of  unfavorable  evi- 
dence is  against  the  merchant. 

However,  if  the  agency  reports  indicate  that  the  mer- 
chant is  possessed  of  ample  assets  in  excess  of  liabilities,  it 
will  be  apparent  that  the  individual  in  question  makes  a 
habit  of  unjustly  complaining.  The  credit  man  should  in- 
vestigate carefully  every  order  of  any  size  from  such  a 
merchant,  and  have  all  dealings  thoroughly  understood  in 
advance  of  shipment,  so  as  to  forestall  and  avoid  unjust 
complaints.  In  rare  cases  it  happens  that  in  addition  to  mak- 
ing unjust  claims,  a  merchant  is  prompt  in  payment  to  the 
point  of  taking  excessive  and  unwarranted  discounts.  Such 
facts  in  a  report  indicate  that  the  merchant  is  in  the  habit 
of  taking  advantage  of  the  jobbers  and  small  manufacturers, 
and  this  should  be  taken  into  consideration  by  the  credit 
man  when  passing  on  a  request  for  credit. 


Part   III — The  Collection  Department 


CHAPTER    XIV 

THE   COLLECTOR   AND   HIS    METHODS 

Qualifications  of  the  Collector 

It  is  only  in  recent  years  that  the  collection  department 
has  been  raised  to  a  position  of  importance  in  the  wholesale 
house.  Formerly  it  was  the  custom  to  delegate  the  collecting 
to  the  bookkeeper,  or  to  a  minor  clerk  who  had  entered  the 
office  with  a  view  to  learning  the  details  of  the  business. 
Now  the  thoughtful  credit  man  realizes  that  the  prompt  col- 
lection of  accounts  is  more  than  half  the  battle  in  keeping 
down  the  percentage  of  losses,  and  that  the  qualifications  of 
the  collector  are  therefore  a  matter  of  much  importance. 

It  is  a  fallacy  to  suppose  that  a  collector  must  be  born 
to  the  job  and  that  only  one  specially  gifted  can  be  markedly 
successful.  It  is  true  that  some  men  are  peculiarly  fitted  for 
collectors,  but  it  is  true,  also,  that  any  intelligent  person  can 
become  a  good  collector  by  study  and  effort. 

The  collector  must  be  a  good  correspondent*  and  must 
have  a  knowledge  of  common  law  as  well  as  of  the  statutes 
of  the  various  states  in  which  the  firm  is  operating.  His 
position  calls  for  the  exercise  of  diplomacy  and  common 
sense.  He  must  realize  that  collecting  is  not  merely  getting 
the  money  from  the  delinquent;  for  his  house  expects  to 
continue  to  sell  merchandise,  and  it  wishes  to  retain  the 
delinquent  as  a  customer. 


*See  Chapter  XV. 


148  THE    COLLECTION    DEPARTMENT 

Relations  of  the  Credit  and  Collection  Departments 

If  the  business  of  the  house  is  small  so  that  the  credit 
man  can  also  look  after  the  collections,  he  can  apply  to  this 
branch  of  his  duties  his  knowledge  of  the  accounts,  and  of 
the  condition  of  debtors,  and  often  a  personal  acquaintance 
with  them.  From  the  viewpoint  of  a  collector,  however, 
this  personal  acquaintance  may  be  a  detriment  to  the  proper 
handling  of  an  account.  The  credit  man  may  be  inclined 
to  leniency  amounting  to  tardiness  in  enforcing  collection, 
while  the  practiced  collector,  unhampered  by  personal  con- 
siderations, keeps  ever  in  mind,  first,  last,  and  all  the  time, 
just  what  he  is  after,  and  bends  every  effort  to  induce  the 
delinquent  to  remit  the  amount  past  due. 

However,  the  collector  cannot  handle  delinquents  suc- 
cessfully unless  he  is  acquainted  with  their  credit  standing. 
This  knowledge  can  be  gained  only  by  a  thorough  study  of 
the  credit  files.  Unless  time  is  devoted  to  a  study  of  the 
account,  the  collector  might  as  well  draw  up  a  series  of  form 
letters  and  delegate  his  work  to  the  ofifice  boy.  Even  after 
studying  the  files  he  should  consult  the  credit  man,  and 
under  no  circumstances  should  he  adopt  drastic  measures 
for  collecting  a  dif^cult  account,  without  the  approval  of  the 
credit  manager. 

Above  all,  there  should  exist  between  the  credit  man  and 
the  collector  a  spirit  of  co-operation  and  friendly  inter- 
course. Their  positions  are  so  closely  allied  that  any  fric- 
tion works  harm  to  the  house.  The  credit  man  should  have 
authority  over  the  collection  department,  even  to  being  re- 
sponsible for  its  work;  and  he  should  therefore  be  given 
the  privilege  of  choosing,  or  at  least  approving  the  selection 
of,  the  individuals  who  constitute  the  personnel  of  that 
department.  The  collector  himself  should  be  allowed  free- 
dom in  the  selection  of  the  workers  who  are  directly  under 
him  and  for  whose  work  he  is  responsible. 


THE    COLLECTOR    AND    HIS    METHODS 


149 


The  Collector  and  the  Customer 

A  part  of  the  policy  of  every  house  should  be  the  educa- 
tion of  its  customers  in  habits  of  prompt  payment.  A  house 
that  is  a  prompt  collector  and  shows  its  customers  that  their 
accounts  are  carefully  watched,  will  command  more  respect 
than  the  careless  house,  and  will  almost  invariably  be  paid 
first. 

The  collector  must  thoroughly  understand  the  policy  of 
the  credit  department  and  of  the  sales  department  as  well. 
Above  all,  he  should  strive  to  cultivate  toward  the  customer 
that  cordial  feeling  which  leads  to  the  general  popularity 
of  any  house  among  its  customers.  To  be  popular  in  busi- 
ness is  next  to  being  successful;  in  fact,  the  most  successful 
houses  the  world  over  are  the  most  popular,  and  it  may  be 
noticed  that  the  reverse  of  this  is  equally  true.  A  house 
which  spends  time,  money,  and  thought  in  building  up  a 
fine  trade  and  an  excellent  list  of  customers,  cannot  afford 
to  have  this  work  torn  down  by  the  carelessness  or  ineffi- 
ciency of  a  cold-blooded  collection  department. 

The  collector  must  keep  informed  on  the  debtor's  local 
conditions.  Sickness,  crop  failures,  or  adverse  weather 
often  cause  a  good  merchant  to  become  slow  in  settling  his 
bills,  and  this  same  merchant  may  be  foolishly  jealous  of 
his  good  credit  and  extremely  sensitive  about  his  condition. 
If  the  files  show  such  a  man  to  be  honest  and  reasonably 
solvent,  an  extension  should  not  be  withheld.  The  very 
bonds  of  sympathy  beget  a  feeling  of  confidence;  and  con- 
fidence between  a  house  and  its  customers,  whether  in  buy- 
ing, selling,  or  collecting,  is  an  important  factor.  If  an 
extension  is  asked,  the  favor  should  be  conferred  in  a 
kindly  spirit,  or  else  not  at  all.  If  the  debtor  feels  that  he 
has  simply  forced  an  unwilling  favor,  it  ceases  to  be 
regarded  as  a  favor  and  he  feels  that  he  is  under  no  obliga- 
tions.   The  granting  of  an  extension  may  afford  an  excel- 


150 


THE    COLLECTION    DEPARTMENT 


lent  opportunity  to  ask  the  debtor  for  a  statement  of  his 
affairs,  or  to  procure  other  information  from  him  which 
will  be  of  great  value  to  the  credit  department. 

Often  the  small  country  merchant  does  not  appreciate 
the  fact  that  his  account  should  be  paid  simply  because  it  is 
due,  and  statements  or  ordinary  dunning  letters  do  not  move 
him  to  make  even  a  reply.  But  occasionally  in  dealing  with 
such  a  debtor  it  is  a  good  idea  to  make  a  personal  appeal  by 
letter,  with  a  very  plausible  reason  why  his  particular  money 
is  needed.  Such  a  request  may  arouse  an  interest  on  his 
part,  which  will  result  in  an  earnest  effort  to  make  the 
remittance. 

No  stronger  argument  can  be  made  to  a  debtor  than  in 
presenting  the  case  to  him  plainly  and  truthfully.  The 
prime  consideration  is  not  to  dodge  the  issue;  to  leave  no 
loophole  in  a  letter  which  will  allow  the  delinquent  to  pro- 
long the  matter.  State  the  proposition  plainly  and  very  cour- 
teously. When  a  man  feels  such  a  quality  in  a  letter — friend- 
ly but  final — he  will  realize  that  he  had  best  come  to  terms 
quickly. 

Delinquent  Debtors 

The  careless  debtor,  or  the  one  who  is  chronically  slow, 
reveals  his  characteristics  in  the  credit  reports,  and  a  col- 
lector knows  what  to  expect  when  he  makes  a  systematic 
effort  to  collect  from  such  a  man.  The  customer  who  is  tem- 
porarily hard  up  and  who  has  had  a  good  paying  record, 
should  be  investigated,  and  the  exact  reasons  for  his  slow- 
ness should  be  ascertained  as  a  matter  of  credit  precaution. 
Possibly  he  may  have  sustained  some  severe  loss  which  will 
eventually  cripple  his  business.  In  such  a  case,  if  the  credit 
man  decides  that  the  customer  is  materially  weakened  by  his 
loss  and  that  it  is  dangerous  to  try  to  help  him  pull  through, 
then,  without  a  moment's   hesitation,  the   collector   should 


THE    COLLECTOR    AND    HIS    METHODS 


151 


demonstrate  his  right  to  his  title  by  exerting  every  means 
in  his  power  to  get  from  under  the  account  before  other  credi- 
tors begin  to  press  the  unfortunate  debtor. 

If  the  house  has  salesmen  coming  regularly  into  the 
office,  the  collector  can  keep  in  touch  with  out-of-town  cus- 
tomers through  these  salesmen;  and  this  should  be  done 
every  time  they  come  in  off  the  road.  A  salesman  will  usu- 
ally know  to  what  extent  a  debtor  is  crippled,  and  proper 
action  can  then  be  taken.  Usually  when  the  credit  department 
has  obtained  such  information  from  the  salesman,  or  from 
other  private  sources,  and  this  information  is  not  generally 
known  to  the  trade,  the  account  can  be  saved  without  doing 
the  debtor  any  harm ;  but  indecision  at  such  a  time  is  fatal. 
The  one  idea  of  getting  from  under  that  particular  account 
should  take  hold  of  the  collector,  and  he  should  not  cease 
his  efforts  until  he  has  his  money  or  security. 

In  the  case  of  a  delinquent  debtor  who  is  still  solvent  but 
pays  no  attention  to  letters,  collection  must  be  forced.  If 
the  credit  reports  show  the  debtor  in  bad  condition,  legal 
proceedings  may  be  necessary,  but,  if  otherwise,  some  of  the 
following  methods  may  prove  effective. 

1.    The  "Collection  Agency"  Method 

A  great  many  houses  operate  a  fictitious  collection 
agency.  Such  an  agency  has  its  letterhead,  drafts,  receipts, 
and,  in  fact,  a  full  line  of  stationery;  a  box  is  rented  at  the 
post-office  and  the  number  is  prominently  displayed  on  all 
the  agency  stationery  to  deceive  the  debtor  as  much  as  pos- 
sible into  thinking  that  he  is  dealing  with  an  outside  agency. 
Direct-demand  letters  are  formulated,  which  in  many  cases 
meet  with  ready  response.  These  letters  are  usually  couched 
in  courteous  terms,  and  an  effort  is  made  not  to  offend  the 
debtor,  but  simply  to  wake  him  up  at  once  and  thoroughly 
to  the  determination  of  the  house  to  collect. 


152 


THE    COLLECTION    DEPARTMENT 


2.  The  Draft  Method 

Occasionally  a  draft  on  a  small  merchant,  if  properly 
placed,  is  productive  of  good  results.  A  well-written  letter 
should  impress  on  him  that  if  the  draft  is  returned  unpaid 
it  will  undoubtedly  affect  his  credit  standing.  When  the 
draft  is  sent  to  a  country  bank  a  letter  should  be  written  to 
the  bank,  and  at  least  ten  cents  in  stamps  should  be  enclosed 
for  the  cost  of  entering  the  draft.  Courteous  instructions 
should  be  given  as  to  presenting  the  draft  and  holding  it  for 
payment,  with  the  further  request  to  remit  the  proceeds,  if 
collected,  in  New  York  exchange  less  the  usual  charges. 
Remember  that  a  bank  is  not  a  collection  agency,  and  that 
such  drafts  are  not  always  desirable,  especially  to  banks  in 
small  towns. 

3.  The  Collection  Agency 

If  the  draft  system  fails  and  the  house  has  no  private 
"fake"  collection  agency — for  that  is  all  it  amounts  to — the 
next  procedure  is  to  intrust  the  collection  either  to  a  com- 
mercial agency,  to  the  Credit  Clearing  House,  or  to  some 
collection  agency  that  will  furnish  a  bond  for  the  faithful 
performance  of  its  duties.  The  first  step  taken  is  usually 
the  sending  of  a  direct-demand  letter  by  the  house,  written 
on  a  printed  form  furnished  by  the  agency,  a  copy  of  which 
is  retained  in  the  office  by  means  of  a  stub ;  a  further  notice, 
usually  a  part  of  the  stub,  being  sent  to  the  agency.  If  this 
is  not  effective,  the  agency  takes  up  the  account  at  the  end  of 
a  certain  time  and  then  handles  it  as  a  regular  legal  collec- 
tion. After  the  account  is  placed  with  the  agency  the  col- 
lector usually  does  nothing  but  possess  his  soul  in  patience 
and  wait  for  results.  He  should,  however,  require  a  report 
on  the  collections  at  regular  intervals,  trace  regularly  and 
vigorously,  and  demand  that  the  collection  agency  follow  up 
the  debtor  without  cessation. 


THE    COLLECTOR    AND    HIS    METHODS  153 

4.    Legal  Proceedings 

Before  deciding  to  adopt  legal  measures  in  the  collection 
of  an  account,  it  is  well  to  consider  the  matter  thoroughly 
from  several  viewpoints.  Legal  action  will  probably  close 
the  account  on  the  firm's  books  for  the  following  reasons : 

In  the  first  place,  the  credit  man  will  always  regard  such 
a  customer  with  suspicion,  and  with  good  cause,  and  he  will 
hesitate  to  grant  him  credit  again. 

Second,  it  will  be  a  good  account  to  drop,  for  a  man  who 
is  sued  by  a  creditor  treasures  it  up  in  his  mind  against  him, 
and  will  take  a  delight  in  catching  such  creditor  unawares 
if  an  opportunity  presents  itself. 

Third,  if  the  customer  is  financially  responsible  and  wor- 
thy of  credit,  he  will  rarely  of  his  own  accord  come  back  to 
trade  with  a  house  which  has  sued  him. 

These  are  the  strongest  arguments  in  favor  of  the  direct- 
demand  system  of  the  collection  agencies.  In  many  in- 
stances the  debtor  can  be  induced  to  pay  and  still  be  saved  as 
a  customer  of  the  house;  also,  such  a  customer  learns  that 
this  particular  house  will  not  stand  for  negligence  and  delay. 

The  house  itself  cannot  make  demands  for  its  money 
through  a  lawyer  without  breaking  off  amicable  relations. 
Such  a  demand  antagonizes  the  debtor  and  throws  him  into 
an  attitude  of  resistance.  However,  when  a  collector  con- 
cludes to  drop  the  customer  and  close  the  account  for  good, 
there  is  no  longer  any  cause  for  hesitancy. 

When  legal  proceedings  are  contemplated,  it  is  desirable 
that  the  collector  obtain  information  regarding  the  courts 
in  whose  jurisdiction  the  debtor  lives.  First,  he  should  see 
what  court  would  have  jurisdiction  over  a  debt  the  size  of 
the  one  to  be  collected.  In  the  rating  books  of  Dun  and 
Bradstreet  will  be  found  a  synopsis  of  the  collection  laws 
of  each  state,  showing  to  what  extent  each  court  has  juris- 
diction and  when  and  how  it  is  exercised.    Then,  if  the  debt 


154  THE    COLLECTION    DEPARTMENT 

is  of  considerable  size  and  comes  within  the  jurisdiction  of  a 
court  of  equity  or  the  Supreme  Court,  it  is  well  to  ascertain 
how  quickly  an  action  and  subsequent  judgment  can  be  ob- 
tained. This  is  very  important,  because  in  some  states  at 
this  time  (191 5)  there  are  certain  courts  covering  actions 
ranging  from  $100  and  upwards,  which  are  from  two  to  five 
years  behind  on  their  dockets ;  that  is,  a  lawsuit  to  collect  a 
debt  could  not  be  reached  and  a  judgment  obtained  until  two 
years  or  more  from  the  filing  of  the  suit,  and  possibly  not 
even  then. 

Also,  if  the  statement  of  the  customer's  account  com- 
prises a  number  of  unpaid  items,  some  past  due  and  some  not 
yet  due,  a  situation  arises  calling  for  a  considerable  amount 
of  caution;  for  in  many  cases  an  action  begun  for  the  col- 
lection of  part  of  an  account  renders  void  the  obligation  as 
to  the  remainder.  In  some  states  a  creditor  is  prohibited 
from  beginning  action  on  an  account  until  all  items  of  the 
account  are  due.  Again,  an  action  begun  against  a  debtor 
for  an  entire  account,  a  part  of  which  is  not  due,  may  lead  to 
a  damage  suit.  The  handling  of  such  an  account  is  there- 
fore a  matter  requiring  the  utmost  caution. 

The  Collection  Attorney 

When  it  is  decided  to  send  a  claim  direct  to  an  attorney, 
all  further  business  relations  with  the  debtor  have  practically 
been  broken  off.  When  this  point  is  reached,  nothing  is  to  be 
gained  by  waiting.  Set  aside  all  policy  and  give  the  at- 
torney instructions  to  proceed  to  vigorous  and  aggressive 
action.  All  the  preliminary  work  of  notifying  and  coaxing 
the  debtor  has  been  done,  and  the  attorney  is  simply  the  rep- 
resentative on  the  ground  to  see  that  the  processes  of  law  are 
enforced.  He  should  adopt  any  measures  possible  to  collect 
the  account,  even  to  attachment  or  bankruptcy  proceedings. 
If  the  debtor  is  solvent  a  claim  can  usually  be  made  without 


THE    COLLECTOR    AND    HIS    METHODS 


155 


much  trouble;  and  even  if  the  debtor  is  in  a  critical  condi- 
tion he  will  make  a  desperate  effort  to  pay  before  suit,  in  or- 
der to  save  himself  from  the  attacks  of  other  creditors.  The 
credit  man  is  usually  in  possession  of  facts  that  will  enable 
him,  or  the  collector,  to  instruct  the  attorney  as  to  what 
course  to  adopt.  As  to  the  proper  time  to  send  a  claim  to 
an  attorney,  a  motto  appearing  in  advertisements  and  other 
literature  of  collecting  agencies  may  be  quoted :  "It  is  better 
to  pay  the  attorney  a  small  fee  to  collect  in  full  before 
failure,  than  to  take  23  cents  on  the  dollar  from  an  assignee 
or  trustee  in  bankruptcy." 

When  a  claim  is  sent  to  the  attorney,  he  should  be  bonded 
to  insure  faithful  accounting.  So  important  is  this  one  point 
that  it  is  covered  specifically  in  Chapter  XVI,  to  which  ref- 
erence should  be  made. 

Collector  and  Attorney 

The  attitude  of  the  collector  toward  the  attorney  calls 
for  more  than  a  passing  remark.  All  good  attorneys  ac- 
knowledge receipt  of  a  claim  immediately,  and  usually  make 
some  statement  as  to  the  prospects  for  obtaining  a  settle- 
ment. The  collector  will,  however,  sometimes  encounter  as 
much  difficulty  in  procuring  satisfactory  service  from  an 
attorney,  and  work  as  hard  to  keep  the  attorney  in  line,  as  he 
would  with  the  debtor  himself.  It  must  be  remembered  that 
in  a  small  community  the  attorney  is  usually  a  neighbor  and 
sometimes  a  friend  of  the  debtor;  and  it  also  happens  in 
many  instances  that  a  thoroughly  efficient  lawyer  is  a  poor 
collector.  It  is  therefore  necessary  to  trace  vigorously  every 
claim  sent  to  an  attorney  unless  he  makes  regular  reports. 
There  need  be  no  feeling  of  delicacy  on  this  point.  The  at- 
torney is  being  provided  with  a  share  of  his  practice,  and  it 
is  only  fair  that  he  furnish  full  information  on  all  points  con- 
cerning the  collection. 


CHAPTER    XV 
COLLECTION  AND  CREDIT  CORRESPONDENCE 

Power  of  Expression 

A  most  important  and  fundamental  qualification  of  the 
collector  is  ability  in  correspondence.  Collections  must 
usually  be  made  by  letter,  and  it  is  well  to  have  in  mind  from 
the  outset  that  the  fundamental  purpose  of  a  letter  is  to  take 
the  place  of  a  personal  conversation,  and  that  to  produce  the 
desired  results  the  writer  must  have  power  of  expression. 
A  deficiency  in  such  power  is  caused,  first,  by  lack  of  a  suffi- 
cient vocabulary,  and,  second,  by  a  lack  of  experience  in 
composing  correct  and  forcible  sentences  and  paragraphs. 
One  may  have  a  clear  and  definite  notion  of  what  he  wishes 
to  impart  by  means  of  a  letter,  and  yet  lack  the  ability  to  ex- 
press his  ideas  in  proper  form.  As  a  result,  he  racks  his 
brain  and  loses  valuable  time  in  formulating  a  letter  which 
should  require  but  a  few  minutes.  There  are  on  the 
market  a  number  of  excellent  books  on  business  letter  writ- 
ing, from  which  the  collector  can  derive  valuable  assistance. 

The  test  of  a  collection  letter  is  the  results  secured.  Will 
this  letter  produce  the  desired  effect?  Will  it  secure  the 
action  desired?  Will  it  bring  about  in  the  mind  of  the  re- 
cipient the  attitude  which  is  desirable  ?  These  are  questions 
which  the  writer  must  ask  himself. 

Attitude  toward  the  Customer 

Intelligent  and  unremitting  persistence  is  the  secret  of 
success  in  collecting,  whether  in  person  or  by  letter.  This 
does  not  imply  the  writing  of  a  series  of  annoying  or  offen- 
sive letters.    More  harm  can  be  done  by  harsh,  impolite  let- 

156 


COLLECTION    AND    CREDIT    CORRESPONDENCE     157 

ters,  than  can  be  remedied  by  any  number  of  calls  by  the 
leading  salesman.  Every  letter  should  be  courteous  and  ex- 
pressed in  terms  which  cannot  possibly  offend  or  awaken  a 
spirit  of  opposition.  The  object  should  be  to  make  the 
reader  think  as  the  writer  thinks.  The  flippant,  sarcastic, 
or  brutally  blunt  letter  has  absolutely  no  place  in  a  business 
office;  much  less  is  it  admissible  in  the  credit  or  collection 
departments.  Though  it  becomes  necessary  to  sever  rela- 
tions with  the  customer,  or  even  to  threaten  suit,  the  proper 
method  is  to  make  a  dignified  statement  of  facts  and  inten- 
tions which  will  impress  the  recipient  more  forcibly  than  a 
letter  containing  discourteous  or  threatening  remarks.  The 
latter  would  also  provoke  a  feeling  of  resentment  and  re- 
sistance. The  collector's  personality — which  should  be  a 
persuasive  one — should,  therefore,  show  so  strongly  in  his 
letters  that  a  responsive  chord  will  be  struck  in  the  recipient. 
Civility  is  always  better  than  bluntness.  It  will  get  more 
business  and  likewise  more  money. 

The  mental  attitude  of  the  collector  should  be  that  of  a 
promoter  of  mutual  interests.  In  handling  an  account  by 
correspondence  he  should  familiarize  himself  with  the  char- 
acter of  the  customer.  He  should  put  himself  in  the  cus- 
tomer's place  and  endeavor  to  feel  the  effect  that  his  letter 
will  produce. 

The  Cost  of  Making  a  Customer 

It  should  never  be  forgotten  that  it  costs  money  to  sell 
goods  and  get  customers  on  the  books;  and  the  best  cus- 
tomers are  often  the  easiest  to  drive  away.  Some  houses  go 
so  far  as  to  calculate  just  what  it  has  cost  in  expense  money, 
advertising,  time  of  office  and  salesmen,  to  sell  a  prospective 
customer  and  to  make  him  a  regular  purchaser.  If  the  credit 
man  or  the  collection  manager  will  only  bear  in  mind  what 
it  has  cost  to  take  the  order,  he  will  never  deliberately  drive 


1^8  THE    COLLECTION    DEPARTMENT 

a  customer  away  from  the  house  by  harsh  letters.  To  sum 
up  the  subject,  it  is  simply  a  plain,  straightforward,  cour- 
teous letter  that  produces  the  best  results. 

Collection  Correspondence 

Regarding  the  actual  collecting  of  accounts,  whole  books 
have  been  written,  and  the  subject  will  therefore  be  treated 
very  briefly  here. 

The  first  collection  letter,  after  a  statement  has  been 
submitted,  might  be  termed  the  "first  request."  After  this 
"first  request"  there  are  probably  a  number  of  good  cus- 
tomers to  whom  can  be  sent  a  "second  request"  on  a  regular 
form;  but  to  the  chronically  slow  ones  it  is  better  to  write 
a  letter  to  fit  the  individual  case.  Where  the  letter  makes 
specific  requests  for  a  settlement  within  a  certain  time  limit, 
and  seems  rather  blunt,  it  is  sometimes  advisable  to  write 
just  a  few  words  of  a  complimentary  closing  so  as  not  to 
make  it  sound  too  harsh.  This  is  left  to  the  judgment  of 
the  correspondent,  who  must  know  the  condition  of  the  ac- 
count on  the  books. 

After  the  second  request  letter  has  gone  out,  the  number 
and  tenor  of  the  subsequent  letters  must  be  governed  by  the 
conditions.  They  will  naturally  become  more  personal  and 
individual  as  the  account  runs.  The  condition  of  each  ac- 
count should  be  analyzed  and  the  letter  go  straight  to  the 
root  of  the  situation,  so  that  the  recipient  will  know  that  it 
is  intended  for  him  alone  and  that  it  is  not  merely  a  regular 
form  of  dunning  letter. 

Just  how  far  the  letters  must  be  carried,  and  whether 
drafts  and  other  collection  devices  will  be  used,  and  when 
the  account  will  be  placed  in  the  hands  of  a  collection  agency, 
or  attorney,  is  for  the  individual  to  determine  according  to 
the  nature  of  the  account  and  the  policy  of  his  house  toward 
delinquent  debtors. 


COLLECTION    AND    CREDIT    CORRESPONDENCE     159 

Form  Letters 

By  "form  letters"  is  meant  here  the  printed  or  multi- 
graphed  forms.  It  is  a  great  mistake  for  the  collection 
manager  to  get  into  the  form-letter  habit.  Few  such  letters 
can  be  profitably  employed  in  the  collection  department, 
since  each  case  must  be  treated  according  to  the  circum- 
stances peculiar  to  that  case. 

Form  letters  in  the  collection  department  can  in  reality 
produce  good  results  only  in  a  retail  office  which  carries  a 
large  volume  of  accounts.  In  such  case  the  first  and  second 
request  letters  can  be  multigraphed,  provided  they  are  care- 
fully and  neatly  filled  in  on  the  typewriter ;  but  unless  this  is 
done  with  great  care,  it  is  better  to  have  the  form  complete- 
ly copied.  Beyond  these  two  letters,  the  multigraphed  form 
should  not  be  used.  This  does  not  mean  that  letters,  or 
paragraphs  of  letters  already  prepared,  cannot  be  used  when 
they  apply,  or  can  be  modified  so  as  to  apply,  and  thereby 
save  the  labor  of  composing  new  matter  each  time,  but 
merely  that  each  case  must  be  handled  in  accordance  with  the 
conditions;  and  this  cannot  be  done  with  a  letter  already 
completely  prepared. 

Requests  for  Credit  Information 

One  of  the  most  difficult  letters  to  write  is  that  request- 
ing from  the  purchaser  a  signed  statement  to  serve  as  a  basis 
for  credit.  When  this  is  to  be  done,  care  must  be  taken  to 
set  forth  clearly  the  necessity  for  the  desired  information, 
but  at  the  same  time  the  least  intimation  of  doubt  as  to  the 
customer's  good  standing  must  be  avoided.  If  a  reply  is  not 
forthcoming,  a  second  letter  is  drafted  along  the  same  lines 
as  the  first,  merely  elaborating  on  the  inability  to  procure 
satisfactory  information,  but  still  maintaining  the  idea  of 
the  "signed  statement"  for  the  purpose  of  procuring  credit. 

It  is  important  to  bring  this  idea  in  clearly.    If  it  is  nee- 


l6o  THE    COLLECTION    DEPARTMENT 

essary  to  demand  a  signed  statement,  then  it  is  also  necessary 
to  couch  the  letter  in  such  terms  that  it  will  serve  the  pur- 
pose of  evidence  in  court  should  occasion  for  prosecution 
arise.  The  letter  should  always  be  courteous,  but  never- 
theless should  contain  the  facts  that  a  lawyer  would  require 
in  order  to  show  that  a  statement  was  solicited  with  the 
object  of  obtaining  the  signed  statement  for  credit  purposes. 
Every  succeeding  letter  should  also  be  drafted  in  terms  that 
admit  of  no  other  construction  than  as  demanding  the  report 
for  use  as  a  basis  of  credit.  Needless  to  say,  it  is  most  im- 
portant to  keep  an  exact  copy  of  each  letter  for  possible 
future  use  in  court,  and  it  is  best  to  place  the  copies  in  the 
credit  folders  themselves  in  order  to  have  an  unbroken 
record  of  the  whole  transaction. 

Requests  for  Security 

If  a  party  is  unworthy  of  credit,  it  is  sometimes  necessary 
to  ask  for  cash  in  advance  before  shipping,  or  to  request 
security  or  guaranty  against  a  shipment.  The  credit  man 
sometimes  discovers  from  the  trade  investigation  reports, 
or  from  the  commercial  agencies,  that  bills  are  being  guar- 
anteed by  friends  or  relatives  of  the  customer.  In  this  event 
the  letter  might  suggest  that  the  customer  send  notes  signed 
by  himself  and  indorsed  by  such  guarantors. 

In  requesting  cash  or  security  against  an  order  from  a 
small  merchant,  it  is  important  to  make  the  matter  very  easy 
for  him  to  understand.  In  the  letters  written  to  him  men- 
tion should  always  be  made  of  the  amount  or  approximate 
amount  of  the  bill,  and  sometimes  a  copy  of  the  invoice 
should  be  enclosed  to  remind  the  customer  of  just  what  he 
has  purchased,  and  at  what  prices,  etc.  Frequently  the  sight 
of  the  bill  itself  awakens  in  his  mind  the  fact  that  the  goods 
are  just  what  he  is  needing,  or  that  he  is  obtaining  especially 
good  values.     This  is  simply  a  plan  to  bring  into  play  the 


COLLECTION  AND  CREDIT  CORRESPONDENCE  i6i 

possessive  propensity,  to  the  end  that  the  desired  cash  or 
security  may  be  forthcoming. 

Importance  of  Notes  as  Evidence 

Next  in  importance  to  procuring  the  cash  itself,  if  that 
cannot  be  accomplished,  is  the  obtaining  of  notes  properly 
indorsed.  Notes  serve  two  purposes.  First,  in  nearly  all 
states,  they  represent  such  evidence  as  admits  of  no  con- 
troversy in  court,  the  notes  serving  both  as  evidence  and  as 
acknowledgment  of  the  debt.  (This  is  the  law  in  nearly 
every  state  except  in  Mississippi,  where  it  is  varied  by  what 
is  known  as  the  Anti-Commercial  Statute. )  Second,  a  small 
merchant  usually  understands  a  note,  and  its  simple  indorse- 
ment can  be  made  readily  and  the  transaction  closed. 

Forms  of  guaranty  against  open  accounts  are  shown  in 
the  Appendix.*  If  one  of  these  forms  is  to  be  used,  it  is  well 
to  fill  it  out  completely,  ready  for  the  signatures.  The  terms 
of  this  guaranty  must  be  strictly  observed  to  make  it  effec- 
tive. If  a  limited  guaranty  is  given,  to  apply  to  one  par- 
ticular bill  or  shipment,  it  follows  that  it  would  be  very 
unwise  to  ship  additional  goods  against  the  same  guaranty. 
Again,  if  a  guaranty  covering  a  running  account  is  fur- 
nished, the  account  must  be  closely  watched  to  see  that  the 
terms  of  the  guaranty  are  strictly  observed. 

In  each  of  these  cases  the  credit  man,  or  the  collector, 
must  know  how  to  frame  his  letter  in  order  to  bring  about 
the  desired  results  without  making  the  customer  suspicious 
that  the  writer  has  some  ulterior  motive  behind  his  request. 

Refusal  of  an  Order 

Sometimes  it  is  necessary  to  refuse  an  order  entirely.  In 
many  houses  the  practice  of  deliberately  "turning  down''  an 
order  has  been  discontinued,  and  in  its  stead  are  used  letters 


*  Forms  22,  23. 


l62  THE    COLLECTION    DEPARTMENT 

requesting  the  cash  or  security.  These  letters  are  followed 
up,  thereby  indicating  to  the  purchaser  that  his  business  is 
desired,  and  that  if  proper  arrangements  are  made,  his  order 
will  receive  the  best  attention.  This  is  advisable  for  the  rea- 
son that  the  merchant  might  eventually  become  a  desirable 
credit  risk.  It  should  always  be  the  policy  of  the  credit  office 
to  write  to  the  customer  or  purchaser  in  so  friendly  and 
courteous  a  tone  as  to  produce  on  his  mind  the  idea  that  he 
is  getting  a  square  deal. 

Answers  to  Complaints 

Complaints  from  customers  are  often  handled  through 
the  correspondence  of  the  credit  office.  Unjust  demands, 
excessive  discounts,  interest,  and  claims  of  all  kinds,  deserve 
the  best  thought  of  the  business  brain  as  well  as  the  best 
ability  of  the  letter  writer.  In  such  cases  the  claim  is  first 
thoroughly  investigated  and  sifted,  as  it  were,  and,  when 
thoroughly  understood,  is  handled  according  to  the  policy 
of  the  house.  Everything  depends  upon  putting  the  matter 
before  the  customer  in  plain,  simple  language.  The  problem 
should  be  analyzed  and  explained,  item  by  item,  and  details 
treated  so  as  to  leave  no  possible  argument  permitting  of 
further  discussion.  The  attitude  should  be  adopted  that  the 
matter  is  being  handled  in  a  fair-minded  way  with  a  fair- 
minded  man.  "Don't  argue  with  a  customer,"  is  good  ad- 
vice for  the  letter  writer  as  well  as  for  the  man  at  the  desk 
when  he  comes  into  personal  contact  with  the  customer. 


CHAPTER    XVI 

COLLECTION  AGENC'lES 

Collection  Nomenclature 

A  collection  agency  is  just  what  its  name  indicates — 
an  organization  for  the  collection  of  debts.  When  a  credit 
man  checks  through  an  order  for  shipment,  the  bill  is  posted 
to  the  ledger,  and  is  spoken  of  as  an  "account."  When  the 
account  matures,  or  falls  due,  it  is  spoken  of  in  general 
terms  as  a  "collection,"  or,  more  exactly,  an  item  to  be  col- 
lected. If  the  collection  is  not  readily  made  or  a  promise 
of  payment  is  not  forthcoming,  it  assumes  the  nature  of  a 
"bad  debt."  Of  course,  bad  debts  may  be  divided  into 
further  classes  based  on  the  difficulty  in  effecting  settlement. 

Dun's  and  the  Clearing  House 

There  are  two  great  collection  agencies  which  are  acces- 
sible to  every  credit  man.  They  are  the  collection  depart- 
ments of  Dun,  and  the  Credit  Clearing  House.  When  the 
credit  man  places  a  collection  with  one  of  these  he  can  rest 
assured  that  it  will  receive  prompt  and  vigorous  attention ; 
and  if  the  collection  is  made  he  will  receive  the  proceeds 
immediately.  The  great  amount  of  assets  back  of  these 
agencies  insures  absolute  safety.  Should  any  of  their  at- 
torneys fail  to  account  for  money  collected,  the  agency  will 
make  it  good.  The  credit  man  cannot  always  have  this 
feeling  of  security  when  handling  a  collection  through  some 
of  the  smaller  collection  agencies  or  through  his  own  at- 
torney, unless  he  has  had  sufficient  foresight  to  send  the 
claim  under  a  forwarding  bond. 

Each  district  office  of  these  two  large  agencies  has  its 

163 


164  THE    COLLECTION    DEPARTMENT 

own  collection  department,  in  charge  of  a  thoroughly  trained 
collection  officer,  usually  an  attorney.  The  department  has 
its  form  letters,  drafts,  corresponding  attorneys,  and  a 
thoroughly  organized  system  which  works  with  the  regu- 
larity of  a  clock. 

In  addition  to  this  there  is  a  strong  moral  argument  for 
the  placing  of  accounts  with  these  agencies.  They  repre- 
sent the  forces  which  record,  pass  on,  and  circulate  the 
information  whereby  the  debtor  obtains  credit.  If  he  allows 
himself  to  fall  into  bad  repute  with  the  agencies,  his  credit 
standing  suffers.  The  average  debtor,  even  when  he  will 
pay  no  attention  to  an  unknown  agency  or  an  attorney  who 
threatens  to  sue  him,  will  make  a  strong  effort  to  settle  with 
one  of  these  larger  agencies. 

The  Work  of  the  Collection  Agency 

The  advantages  of  agency  collection  are  many.  One  of 
importance  is  found  in  the  unfailing  regularity  and  system 
with  which  it  operates.  The  overworked  credit  man,  with 
a  constant  addition  of  new  items  of  worry  almost  hourly, 
is  in  no  condition  to  handle  a  number  of  collections  with  the 
system  and  follow-up  methods  employed  by  the  agencies. 

At  the  time  the  first  notice  is  sent  to  the  debtor  a 
"tickler"  or  follow-up  system  is  started,  so  that  every  few 
days  this  collection  item  comes  to  hand  automatically,  and 
the  debtor  is  sent  another  notice.  Thus  he  receives  a  con- 
stant prodding  until  the  claim  is  sent  to  the  agency's  local 
attorney.  Here  again  the  debtor  has  no  rest.  One  of  the 
strongest  argimients  for  patronage  advanced  by  the  agencies 
is  the  fact  that  their  attorneys  receive  such  great  numbers  of 
claims  for  collection  that  they  give  agency  business  attention 
over  all  else. 

Another  advantage  of  the  collection  agency  is  that  an 
arrangement  can  usually  be  made  for  a  direct-demand  sys- 


COLLECTION    AGENCIES 


i6s 


tern.  That  is,  the  agency  makes  a  direct  demand  upon  the 
debtor  for  the  payment  of  the  account,  and  gives  him  the 
privilege  of  remitting  direct  to  the  creditor  himself.  Where 
a  collection  is  made  under  this  system,  only  a  small  per- 
centage is  charged.  The  direct  demand  and  the  agency  draft 
are  wonderful  helps  to  the  credit  man,  and  the  cost  of 
collection  is  much  less  than  if  made  through  a  private 
attorney. 

In  order  to  secure  the  best  results  when  a  claim  is  sent 
to  a  collection  agency,  the  credit  man  should  make  a  brief, 
or  synopsis,  of  the  latest  information  in  his  file,  and  give  as 
nearly  as  possible  the  condition  of  the  debtor.  This  is  im- 
portant, because  the  information  of  the  commercial  agencies 
may  not  be  closely  up  to  date,  as  their  reports  are  not  sup- 
posed to  be  revised  oftener  than  every  six  months.  The 
Credit  Clearing  House  has  an  advantage  in  this  respect, 
in  that  its  reports  show  how  the  debtor  is  paying  his  bills 
and  whether  other  claims  are  out  for  collection;  and, 
through  its  accumulated  ledger  facts,  its  collection  manager 
knows  just  how  much  pressure  to  bring  to  bear  on  the 
debtor. 

The  credit  man  can  procure  from  his  collection  agency 
a  supply  of  draft  blanks  which  he  can  sometimes  use  to 
great  advantage.  A  debtor  will  often  pay  attention  to  a 
draft  of  this  nature  when  the  ordinary  draft  has  no  effect, 
for  he  has  learned  that  it  is  a  lever  that  sets  in  motion  the 
machinery  which  eventually  accomplishes  the  work. 

The  only  criticism  that  can  be  made  of  the  work  of  the 
better  collection  agencies  is  that  the  form  letter  is  so  much 
in  evidence.  It  is  true  that  the  substance  of  these  letters 
has  been  devised  by  legal  talent  of  the  highest  order  and 
that  they  are  models  of  their  kind;  but  there  are  few  in- 
stances where  the  form  letter  will  work  as  effectively  as  a 
dictated  letter,  which  comes  right  to  the  point  and  bears  the 


l66  THE    COLLECTION    DEPARTMENT 

stamp  of  a  personality.  A  printed  form  letter  sent  to  a 
merchant  of  some  standing  will  have  its  effect,  and  will 
probably  produce  less  resentment  than  a  personally  dictated 
letter;  but  the  small  merchant,  whose  slowness  in  payment 
is  chronic,  needs  something  more  than  a  printed  form  to 
move  him  to  action.  In  such  instances  the  collection  man- 
ager should  realize  the  conditions  and  act  on  his  own  judg- 
ment. 

Advance  Fee  Collection  Agencies 

Above  all  things,  the  credit  man  should  keep  away  from 
any  collection  agency  which  comes  to  him  with  a  proposal 
to  handle  his  bad  debts  upon  payment  of  an  advance  fee. 
There  are  agencies  of  this  kind  all  over  the  country  which 
send  a  smooth-talking  and  very  aggressive  salesman  into 
the  credit  office  to  explain  methods  and  solicit  the  signature 
to  a  contract.  At  first  glance  their  system  is  apparently  fair, 
and  just  what  the  credit  man  wants  for  the  purpose  of  dig- 
ging up  the  old  items  charged  off  to  profit  and  loss  account. 
An  important  feature  of  the  scheme  is  an  advance  fee, 
ostensibly  to  cover  the  cost  of  setting  the  machinery  in 
motion.  The  contract  forms  are  so  skilfully  worded  that 
it  often  develops  later  that  the  agency  has  performed  its 
full  duty  when  it  has  addressed  letters  to  the  debtors  on  the 
furnished  list — and  incidentally  pocketed  the  advance  fee. 

The  retail  dealer  readily  bites  at  such  a  contract  and 
it  is  therefore  the  duty  of  every  wholesale  credit  man  to 
warn  the  retailers  against  signing  any  contract  which  de- 
mands the  payment  of  an  advance  fee.  The  National  As- 
sociation of  Credit  Men  has  for  some  time  waged  a  strong 
fight  against  this  kind  of  collection  agency;  and  should  the 
credit  man  be  in  doubt  regarding  any  such  matter,  he  is 
advised  to  write  to  the  executive  office  of  the  Association, 
and  obtain  full  information. 


COLLECTION    AGENCIES  167 

Adjustments 

There  are  also  collection  agencies  which  operate  through 
an  adjustment  bureau.  The  requirements  of  adjustments 
vary  with  the  conditions,  and  the  work  is  one  which  requires 
a  high  degree  of  skill,  business  judgment,  and  tact  on  the 
part  of  the  adjuster.  It  is  treated  fully  in  Chapter  XVII, 
and  will  be  only  briefly  mentioned  here. 

In  some  cases  the  work  of  the  adjuster  is  constructive 
and  far-reaching.  For  instance,  a  debtor  becomes  involved 
to  such  an  extent  that  he  cannot  pay  all  his  debts  as  they 
fall  due,  yet  he  shows  an  excess  of  assets  over  liabilities 
and  is  a  man  of  ability  and  integrity.  It  would  be  injustice 
of  the  worst  sort  to  close  out  such  a  business  and  deprive 
such  a  man  of  the  means  of  making  an  honest  living.  A 
skilful  adjuster  will  usually  avoid  this  by  getting  the  debtor 
to  allow  his  creditors — ^usually  represented  by  the  adjuster 
— a  hand  in  running  the  business  until  he  tides  over  his  em- 
barrassment. Then  the  responsibilities  of  the  business  fall 
upon  the  adjuster  and  he  has  the  difficult  task  of  bringing 
the  imperilled  undertaking  to  success.  For  this  reason  the 
adjuster  must  not  only  be  a  good  merchandise  man  and  a 
practical  merchant,  but  must  have  all  the  qualities  of  a  good 
credit  man  as  well. 

When  an  adjuster  is  needed,  the  credit  man  must  exer- 
cise great  care  in  selecting  one  who  is  not  only  competent, 
but  one  who  will  observe  •  strictly  the  ethics  of  honorable 
business.  If  the  debtor  can  be  thrown  into  bankruptcy,  it 
is  an  easy  matter  for  an  adjuster  to  enlist  the  services  of  an 
attorney  on  the  basis  of  a  division  of  the  spoils,  and,  as  the 
attorney  filing  the  petition  is  allowed  a  good  fee  out  of  the 
assets,  it  is  a  temptation  to  the  adjuster  to  throw  the  debtor 
into  bankruptcy  when  this  should  not  be  done.  Every  pre- 
caution should  be  taken  to  prevent  collusion  between  these 
two  interests. 


l68  THE    COLLECTION    DEPARTMENT 

Collection  Attorneys 

In  nearly  every  jobbing  center  there  are  attorneys  who 
make  collections  a  strong  feature  of  their  business.  When 
they  are  hard  workers  or  have  unusual  ability  in  this  line, 
they  often  obtain  good  results.  The  credit  man  should  see 
that  an  attorney  to  whom  he  gives  an  account  for  collection, 
furnishes  a  good  bond  for  a  faithful  accounting,  not  only 
on  his  own  part,  but  also  on  the  part  of  the  correspondents 
to  whom  he  intrusts  the  actual  work  of  collecting. 

If  the  credit  man  will  place  his  business  with  lawyers  of 
repute,  he  will  avoid  the  losses  and  worries  that  come  from 
dealing  with  what  is  known  as  the  "shyster"  class.  Among 
the  professions  none  offers  so  many  chances  for  dishonesty 
without  technical  offense,  as  the  law.  Not  infrequently  the 
lawyer  has  the  property  and  reputation  of  his  client  abso- 
lutely at  his  mercy,  but  the  instances  of  a  lawyer  betraying 
his  trust  are  so  few  that  the  legal  profession  as  a  whole  is 
deserving  of  the  highest  commendation.  It  is  incumbent  on 
the  credit  man  to  assist  the  legal  profession  to  maintain  its 
high  principles  of  ethics  and  honor;  and  he  must  absolutely 
refuse  to  place  claims  with  any  attorney  who  does  not  adhere 
in  the  strictest  sense  to  all  the  rules  and  regulations  of 
common  practice. 

The  lawyers'  opportunities  for  "graft"  are  many.  Often 
an  estate  can  be  wound  up  expeditiously  and  at  a  minimum 
expense  in  a  state  court  without  resorting  to  bankruptcy 
measures.  If  there  is  no  evidence  of  fraud,  it  is  manifestly 
not  only  foolish  but  dishonest  for  an  attorney  to  file  an  in- 
voluntary petition  in  bankruptcy  against  such  an  estate, 
purely  for  the  purpose  of  obtaining  the  filing  fees.  Often 
credit  men  are  led  to  join  in  such  proceedings  through  the 
misrepresentations  of  attorneys,  and  they  should  make 
thorough  investigation  before  placing  a  claim  with  an 
attorney  who  solicits  it  with  such  an  object  in  view. 


COLLECTION    AGENCIES 


169 


The  Commercial  Law  League  of  America  has  made 
splendid  progress  in  bringing  practice  in  all  lines  of  com- 
mercial law  to  a  high  standard.  An  attorney  of  standing, 
such  as  a  member  of  the  Commercial  Law  League,  will 
always  set  forth  in  detail  all  the  facts  upon  which  he  might 
advise  the  filing  of  a  bankruptcy  petition ;  and  such  a  lawyer 
is  never  found  in  the  ranks  of  the  "ambulance  chasers."  A 
credit  man  must  respect  the  respect  with  which  lawyers  as 
a  class  regard  their  profession,  and  he  must  never  be  guilty 
of  allowing  an  attorney  to  violate  its  principles  even  though 
it  might  save  a  loss.  The  calling  of  the  credit  man  is  just 
as  honorable  as  that  of  the  legal  profession,  and  it  is  better 
to  stand  a  loss  than  to  enter  into  a  doubtful  league  with  a 
"shyster"  lawyer. 


CHAPTER    XVII 

ADJUSTMENTS    AND    ADJUSTMENT    BUREAUS 

What  Adjustment  Implies 

The  word  adjustment  commonly  signifies  an  amicable 
settlement  of  an  account  through  an  adjuster,  as  opposed  to 
collection  at  the  hands  of  an  attorney.  The  adjustment  of 
a  single  account  where  the  debtor  is  solvent  is  merely  good 
collecting;  the  debtor  is  persuaded  into  settling,  or  he  may 
be  shown  how  to  realize  on  his  assets  or  provide  security 
for  the  account.  For  the  adjuster  the  real  test  of  ability 
comes  when  the  debtor  is  badly  involved,  and  where  the 
assets  hardly  exceed  the  liabilities,  or  where  these  are  so 
badly  proportioned  that  the  quick  assets  form  only  a  small 
share  of  the  whole,  while  the  merchandise  liabilities  are 
for  the  most  part  due  and  pressing  for  payment. 

A  personal  adjustment  implies  a  friendly  settlement. 
The  adjuster,  representing  the  creditor,  comes  as  a  personal 
visitor  from  the  house,  armed  with  authority  to  settle  any 
points  in  dispute;  to  smooth  over  difficulties;  to  keep  the 
creditor  friendly;  and,  above  all  else,  to  get  the  money  or 
security.  If  after  a  thorough  investigation  he  finds  that 
the  creditor  is  solvent  and  that  his  temporary  embarrass- 
ment can  be  relieved,  a  customer  may  be  saved  for  the  house. 
In  such  a  case  the  adjuster  assumes  the  part  of  a  construc- 
tive collector  or  a  builder  of  business,  as  opposed  to  the 
attorney  by  whom  the  relations  between  debtor  and  creditor 
are  abruptly  severed. 

The  Adjuster 

The  adjuster  must  be  a  born  collector  of  infinite  tact  and 
patience,  yet  capable  of  quick  decision.     He  must  be  an 

170 


ADJUSTMENTS    AND    ADJUSTMENT     BUREAUS     171 

expert  accountant,  for  his  investigations  frequently  reveal 
conditions  in  the  books  of  which  the  debtor  never  dreamed. 
He  must  be  a  merchandise  man,  able  to  appraise  a  stock  of 
goods  and  to  estimate  its  quality  without  making  a  detailed 
inventory.  He  must  have  sufficient  knowledge  of  the  law  to 
keep  within  its  limitations,  and  must  know  how  to  draw  his 
papers  when  securing  an  account,  so  that  they  will  stand 
the  test  of  a  lawsuit. 

An  adjuster  should  be  equipped  with  a  complete  credit 
file  relating  to  the  account  and  all  correspondence  in  point, 
together  with  an  itemized  statement  of  the  account  properly 
attested  as  required  by  law.  In  brief,  the  adjuster  is  to 
bring  the  credit  office  face  to  face  with  the  debtor,  and  work 
out  with  him  a  plan  for  the  settlement  of  the  account.  Be- 
cause of  the  expense  of  such  a  personal  visit,  it  is  assumed 
that  the  account  is  of  sufficient  size  to  warrant  the  invest- 
ment of  expense  money. 

One  disadvantage  in  placing  an  account  with  a  profes- 
sional adjuster  must  always  be  borne  in  mind.  The  filing 
of  the  claim  necessarily  notifies  the  adjuster  of  the  condition 
of  the  debtor.  Usually  the  contracts  of  professional  adjust- 
ers are  so  drawn  that  they  may  accept  other  accounts  at  the 
same  time;  otherwise  it  would  not  be  possible  for  them  to 
pay  expenses  and  make  a  profit.  Hence,  when  a  claim  is 
filed  it  is  only  natural  for  the  adjuster  to  call  up  other  clients 
and  announce  his  contemplated  trip  and  its  purpose. 

Elements  of  an  Adjustment 

In  adjusting  an  account,  a  thorough  knowledge  of  the 
debtor's  financial  condition  must  be  obtained  at  the  outset. 
This  knowledge  can  be  gained  only  through  the  co-operation 
of  the  debtor  himself.  The  adjuster  has  a  perfect  right  to 
demand  absolute  frankness  from  the  debtor,  and  he  owes 
it  to  the  credit  office  which  employs  him  to  furnish  indis- 


172 


THE    COLLECTION    DEPARTMENT 


putable  evidence  of  his  examination  into  the  debtor's  affairs. 
The  duties  of  the  expert  accountant  devolve  upon  the  ad- 
juster, who,  if  the  debtor  keeps  an  accurate  set  of  books,  can 
draw  up  a  financial  statement  which  might  well  be  of  assis- 
tance to  the  debtor  himself. 

In  making  up  his  statement  of  assets  and  liabilities,  the 
adjuster  examines  closely  the  various  items,  and  from  the 
asset  sheet  he  prepares  a  further  detailed  statement  setting 
forth  the  approximate  realizable  value  of  each  item,  with 
the  book  value  placed  against  it  for  purposes  of  comparison. 
The  one  important  feature  in  the  valuation  of  the  assets  is 
the  proving  of  the  actual  existence  of  such  assets  as  cash  in 
bank,  securities,  notes,  and  accounts,  and  determining  the 
realizable  value  of  the  last-named  item.  In  the  list  of 
liabilities  the  adjuster  should  show  the  items  with  due  dates 
against  each,  as  well  as  the  names  and  addresses  of  all 
creditors. 

Assuming  a  readiness  on  the  part  of  the  debtor  to  fur- 
nish security  against  a  deferred  settlement  of  the  account, 
the  adjuster  must  know  not  only  the  value  of  this  security 
and  its  safety  as  such,  but  must  so  arrange  as  not  to  create 
a  preference  for,  or  be  detrimental  to,  other  creditors.  Here 
comes  into  play  the  knowledge  of  law — the  most  important 
feature  in  the  equipment  of  the  expert  adjuster.  The 
creation  of  a  preference  may  make  void  all  the  good  that 
has  been  accomplished  in  the  adjustment.  What  constitutes 
a  preference  is  now  generally  understood  by  credit  men,  and 
is  fully  explained  in  the  National  Bankruptcy  Act.* 

The  Credit  Man  as  an  Adjuster 

Such  an  adjustment  as  outlined,  representing  the  collec- 
tion of  an  involved  account,  can  be  made  by  almost  any 
credit  man.    In  this  connection,  too  much  stress  cannot  be 


See  Appendix. 


ADJUSTMENTS    AND    ADJUSTMENT    BUREAUS     173 

laid  upon  the  importance  of  frequent  personal  visits  to  the 
field  by  the  credit  man,  either  alone  or  in  company  with 
the  road  salesmen. 

The  time  has  passed  when  the  credit  man  held  himself 
aloof  with  a  view  to  impressing  upon  customers  the  im- 
portance, or,  as  one  writer  puts  it,  the  "majesty"  of  the 
credit  office.  The  visits  of  the  credit  man  bring  him  into 
friendly  relations  with  the  customers,  and  this  can  be  de- 
veloped to  a  point  where  the  customer  looks  upon  the 
credit  man  as  his  confidential  adviser  in  all  matters  pertain- 
ing to  his  business.  Where  such  relations  exist,  the 
customer  sticks  to  the  house  with  a  loyalty  that  is  truly 
gratifying,  and  the  credit  man  becomes  possessed  of  inside 
facts,  and  is  kept  so  fully  apprized  of  the  condition  of  the 
customer  that  the  credit  line  on  the  account  can  be  raised 
to  the  limit  and  held  there — and  this  is  done  with  more 
safety  than  if  the  line  of  credit  had  been  restricted  and  the 
customer  thereby  forced  to  scatter  his  purchases  among 
many  houses  in  order  to  procure  the  necessary  stock. 

Details  and  Advantages  of  a  ''Real"  Adjustment 

An  occasion  often  arises  where  a  merchant  becomes  in- 
volved to  such  an  extent  that  an  adjustment,  in  the  real 
sense,  is  necessary.  The  theory  of  such  "real"  adjustment 
is  simply  this :  the  debtor,  realizing  his  condition,  turns  over 
all  his  assets  to  a  representative  of  the  creditors.  This  rep- 
resentative— the  adjuster — becomes  a  trustee  in  the  interest 
of  all  the  creditors,  and  through  co-operation  with  the 
debtor  works  out  the  situation  with  a  view  to  realizing  the 
full  value  from  the  assets  of  a  going  concern.  If  the 
creditors  can  be  paid  in  full,  the  business  name  and  reputa- 
tion and  possibly  the  business  itself  can  be  saved  for  the 
debtor.  Through  this  spirit  of  co-operation,  the  assets  and 
good-will    of    the    debtor   become    active    instruments    of 


174 


THE    COLLECTION    DEPARTMENT 


tangible  value;  and  where  the  debtor  was  formerly  strug- 
gling along  by  himself,  making  mistakes  due  to  inexperience 
or  incapacity,  there  is  now  placed  at  his  disposal  through 
the  trustee  the  business  experience,  financial  assistance,  and 
combined  judgment  of  a  body  of  expert  and  efficient  credit 
men. 

Such  is  the  nature  of  adjustments  effected  by  the  adjust- 
ment bureaus  of  the  local  branches  of  the  National  Asso- 
ciation of  Credit  Men.  The  local  bureau  is  organized  under 
the  direction  of  the  members  of  the  Association,  and  the 
active  manager  or  director  is  an  expert  adjuster  who 
handles  the  details.  Such  a  bureau  is  intended  primarily  to 
handle  adjustments  within  the  market  territory  of  its  mem- 
bers, presuming  that  these  members  are  creditors  of  the 
debtor  involved. 

When  it  becomes  known  that  such  a  bureau  is  to  take 
charge  of  an  adjustment,  a  spirit  of  co-operation  obtains, 
and  interested  members  of  the  Association  in  distant  mar- 
kets as  well  as  other  adjustment  bureaus  in  nearer  markets, 
place  their  accounts  with  the  bureau  in  charge.  In  this 
way  a  co-operation  of  creditors  is  assured,  and  the  first 
victory  in  the  adjustment  is  scored  for  the  creditors.  Mani- 
festly, the  success  of  a  real  adjustment  depends  upon  such 
co-operation,  for  it  then  becomes  an  easy  matter  to  secure 
co-operation  on  the  part  of  the  debtor  also.  But  should  he 
remain  obdurate  and  force  the  adjuster  to  resort  to  legal 
measures,  these  are  simplified  because  all  the  creditors  are 
now  cemented  by  a  common  interest  and  act  as  an  individual 
through  the  adjuster.  If,  however,  as  is  usually  the  case, 
the  debtor  is  glad  to  work  in  concert  with  the  adjuster,  a 
happy  condition  obtains  whereby  the  values  realized  from 
the  assets  are  almost  as  high  as  in  the  ordinary  course  of 
trade,  and  the  expenses  in  winding  up  the  estate  are  merely 
nominal. 


ADJUSTMENTS    AND    ADJUSTMENT    BUREAUS     175 

The  "Good  Samaritan"  View 

If  all  merchants  were  honest  or  would  remain  honest 
when  they  become  financially  involved,  and  would  turn  over 
all  their  assets  to  their  creditors,  adjustments  such  as  just 
discussed  would  prove  the  ideal  way  of  settling  an  insolvent 
estate.  It  is  only  when  preferences  are  created  or  assets 
concealed,  that  bankruptcy  proceedings  are  necessary  and 
eminently  proper. 

Assuming  that  a  merchant  debtor  is  behind  in  his  pay- 
ments, that  an  examination  discloses  that  his  assets  exceed 
his  liabilities  by  a  reasonable  margin,  and  that  the  debtor 
is  a  man  of  character  and  ability,  it  is  not  unreasonable 
that  he  should  desire  to  continue  the  business  which  he  has 
started.  Usually  he  may  succeed  if  given  a  chance.  It  is 
such  a  condition  as  this  that  is  handled  so  ably  by  the 
adjustment  bureaus  of  the  National  Association.  The  con- 
servation of  a  man's  business  and  the  saving  of  his  name 
and  honor  are  what  the  Association  strives  for,  and,  when 
it  succeeds,  constitute  an  achievement  as  praiseworthy  from 
an  ethical  standpoint  as  the  saving  of  money  for  the 
creditors  would  be  commendable  from  a  cold-blooded  busi- 
ness view. 

The  constant  aim  of  the  National  Association  is  to  bring 
before  every  credit  man  the  moral  duty  he  owes  his  fellow 
being.  It  is  the  helping  hand  of  the  Good  Samaritan 
adapted  to  modern  business  ideas.  The  lesson  is  so  far- 
reaching,  with  so  many  interminable  branches  and  side 
issues  bearing  on  the  credit  business,  that  this  one  feature 
might  of  itself  form  a  book  of  golden  deeds.  The  ideal 
adjustment,  then,  is  but  an  embodiment  of  all  the  best  that 
is  taught  in  the  life  of  the  Association. 

Bankruptcy  Method  of  Settlement 

As  an  example  of  the  application  of  the  principles  out- 


\y6 


THE    COLLECTION    DEPARTMENT 


lined  above,  as  compared  with  the  bankruptcy  method  of 
adjusting  a  business  which  is  in  difficulty,  the  following 
illustration  is  given. 

A  merchant  of  excellent  character  and  integrity  exhibits 
the  following  conditions : 


Assets 

Stock $5,500.00 

Notes  and  accounts 1,500.00 

Furniture  and  fixtures. . .  300.00 

Real  estate 2,500.00 


Liabilities 

Bank  loan $1,000.00 

Loan  from  friend 500.00 

Merchandise  creditors. . .     2,500.00 
Owing   wages,    taxes, 
etc 200.00 


$4,200.00 
$9,800.00      Apparent  surplus $5,600.00 

The  principal  part  of  the  merchandise  debts  are  due,  and 
some  claims  are  in  the  hands  of  attorneys  for  collection.  A 
drought  has  ruined  summer  trade  and  no  money  can  be 
expected  until  farmers  market  the  late  crops. 

Now,  with  an  apparent  surplus  of  $5,600,  it  would 
appear  at  first  glance  that  the  merchant  was  amply  solvent ; 
but  the  bank  loan  is  secured  by  mortgage  on  the  real  estate, 
and  the  merchant's  statutory  exemptions  take  up  the  re- 
mainder, for  the  real  estate  at  a  forced  sale  in  bankruptcy 
would  not  bring  the  mortgage  plus  the  exemptions.  At  a 
forced  sale  with  few  bidders  present,  a  general  stock  in  a 
country  store  would  bring  about  fifty  cents  on  the  dollar, 
and  the  accounts  would  dwindle  down  to  about  60  per  cent 
of  the  total ;  while  the  fixtures  at  a  forced  sale  would  bring 
whatever  a  bidder  might  offer. 

If  matters  are  allowed  to  take  their  usual  course,  the 
attorney  takes  judgment  and  an  execution  is  levied;  the 
merchant  makes  an  assignment;  and  then,  determined  to 
get  all  there  is  in  it,  the  attorney  files  an  involuntary  petition 
in  bankruptcy  for  the  benefit  of  the  creditors.     After  the 


ADJUSTMENTS    AND    ADJUSTMENT    BUREAUS 


177 


legal  proceedings  and  the  reduction  of  assets  to  a  cash  basis, 
this  is  how  the  new  balance  sheet  appears : 


Assets 

Stock,  50% $2,750.00 

Accounts,  60% 900.00 

Furniture  and  fixtures. . .       100.00 


$3,750.00 


Liabilities 

Expense,  state  courts. . . .  $50.00 
Attorney's    fees,    state 

courts 50.00 

Expenses,  bankruptcy...  450.00 

Debts  preferred  by  law. .  200.00 


$750.00 
Leaving  apparently....  $3,000.00 


The  $750  expenses  are  apparently  the  maximum  allowed 
under  the  law,  although  by  skillful  handling  a  good 
attorney  and  a  friendly  receiver  might  make  more  for  each 
other  and  still  remain  within  the  law.  The  balance  sheet 
figures  out,  apparently,  a  payment  in  full  for  the  $3,000 
debts — merchandise  creditors,  $2,500,  and  the  $500  loan — 
but  while  there  is  apparently  100  per  cent  in  sight,  every 
credit  man  knows  that  a  75  per  cent  settlement  is  nearer 
to  what  he  will  get.  The  debtor  is  left  with  apparently 
$1,500  equity  in  his  real  estate;  but  when  the  proceedings 
are  ended,  the  bank  forecloses  the  mortgage  and  is  forced  to 
bid  in  the  property  to  save  its  debt.  The  bank  stands  to 
make  a  little  profit  when  it  can  sell  the  property  again. 
Thus  it  will  be  seen  that  in  a  perfectly  legal  manner  there 
has  been  wasted  $5,600  in  assets,  and  a  good  man  has  been 
financially  ruined  for  life.  He  is  not  likely  to  get  back  on 
his  feet  unless  he  is  young  and  of  unusual  ability. 

Credit  Association  Method 

To  illustrate  a  better  settlement  of  this  same  case,  let 
us  suppose  that  the  manager  of  one  of  the  adjustment 
bureaus  arrives  on  the  scene  and  takes  charge.  He  may 
represent  only  a  few  creditors  at  the  start,  but  soon  he  has 


1^8  THE    COLLECTION    DEPARTMENT 

a  majority  in  number  and  amount  of  claims — the  moral  in- 
fluence of  the  Credit  Men's  Association  is  at  work.  The 
claims  are  either  withdrawn  from  the  hands  of  the  at- 
torneys, or  the  latter  capitulate  and  work  in  accord  with  the 
adjuster.  There  must  be  full  co-operation  on  the  part  of 
the  merchant,  which  is  readily  obtained  when  the  bright 
ray  of  hope  strikes  him.  The  bank  is  persuaded  to  lengthen 
the  time  of  its  loan,  for  it  is  amply  secured  and  the  average 
country  bank  is  usually  most  accommodating  to  its  patrons. 
The  friendly  loan  of  $500  may  be  taken  care  of  by  a  second 
mortgage  on  the  equity  of  the  debtor  in  his  real  estate, 
which  otherwise  would  form  his  exemptions.  The  stock  of 
goods  and  the  accounts  become  live  assets  to  the  now  "going 
concern,"  and  are  worth  nearly  one  hundred  cents  on  the 
dollar.  The  small  debts  outstanding  are  adjusted,  being 
either  paid  off  or  gotten  into  such  shape  that  no  trouble  will 
be  caused  by  a  creditor  whose  interest  is  small  and  whose 
patience  is  short-lived. 

The  adjuster  then  proceeds  to  work  on  his  statement 
sheet  which  he  makes  up  at  the  earliest  possible  moment. 
His  knowledge  of  merchandise  and  store  methods  is  now 
brought  into  play.  The  stock  is  replenished  by  the  largest 
creditors,  and  possibly  "a  special  sale"  may  be  arranged. 
The  adjuster  supervises  the  arrangement  of  the  store,  writes 
the  sales  circulars  and  advertisements,  and  starts  the  new 
business  with  a  big  boost.  In  the  meantime  he  is  helping 
the  merchant  with  his  collections,  frequently  making  per- 
sonal visits  to  the  largest  debtors,  explaining  the  situation, 
and  turning  these  slow  accounts  into  cash,  produce,  or 
good  notes  which  can  be  sold  without  recourse.  The  ad- 
juster is  a  good  trader;  and  a  fine  beef  steer,  a  young  cow 
and  calf,  or  a  fat  shoat,  looks  better  to  him  than  a  poor 
account  a  year  old  on  the  books.  He  shows  the  merchant 
a  few  tricks  in  the  collecting  business  that  open  his  eyes. 


ADJUSTMENTS    AND    ADJUSTMENT    BUREAUS     1^79 

When  the  proceeds  of  the  collections  are  converted  into 
money,  and  the  cash  sales  have  accumulated  for  a  few 
days,  there  is  a  substantial  cash  dividend  to  be  distributed 
among  the  creditors. 

While  all  this  is  going  on,  the  adjuster  has  heard  from 
the  various  credit  men  on  the  subject;  and  their  advice  is 
practical  and  good.  Each  one  points  out  whatever  weak- 
nesses he  has  noticed  in  the  merchant,  and  how  he  thinks 
these  can  be  corrected.  In  a  very  few  days  the  adjuster 
knows  more  about  the  merchant  and  his  business  than  the 
latter  himself  knows.  The  adjuster  digs  into  the  books 
and  into  the  business  to  ascertain  why  the  merchant  has  not 
been  successful.  Every  conceivable  excuse  is  investigated, 
every  theory  is  tested  and  proved.  If  the  merchant  has 
shown  any  ability  whatever — and  practically  every  mer- 
chant who  has  accumulated  as  much  as  $5,000  must  have 
shown  some  signs  of  ability — the  adjuster  starts  along  the 
lines  of  a  business  educator,  correcting  the  faults  that  are 
most  apparent.  Very  frequently  the  cause  of  a  merchant's 
failure  can  be  traced  to  theft  by  an  employee.  In  fact, 
stealing  by  employees  is  so  common  that  a  skilled  adjuster 
investigates  this  condition  as  soon  as  he  takes  charge  of 
the  business. 

The  time  of  the  adjuster  is  valuable;  he  must  work  night 
and  day,  as  if  fighting  fire.  When  he  is  ready  to  return  to 
his  office,  all  plans  are  carefully  laid  and  the  merchant 
simply  has  to  follow  them  out  to  the  letter.  In  the  end  the 
merchant  works  out  from  under  the  trusteeship  of  the  ad- 
justment. The  lessons  he  has  learned  are  numerous;  in 
brief,  the  experience  is  such  that  he  is  almost  sure  of  success 
in  his  future  business.  The  wholesale  houses  save  their 
accounts  in  full  and  make  of  this  merchant  a  desirable 
customer  for  life. 

The  ideals  of  this  adjustment  feature  of  the  Association 


^ 


1 80  THE    COLLECTION    DEPARTMENT 

work  are  set  on  a  high  level.  A  premium  has  l)een  placed 
on  honesty  and  integrity,  and  the  business  world  generally 
has  benefited.  The  outside  houses  which  share  in  such  an 
adjustment  are  quick  to  perceive  the  needlessness  and  folly 
of  so-called  legal  methods  in  closings  up  an  estate  at  a  loss, 
that  might  just  as  well  be  allowed  to  run  along  and  work 
itself  out  at  a  profit,  and  they  are  generally  aroused  to  the 
need  of  a  perrnanent  adjustment  bureau. 


Part  IV — Insolvency 

> 

CHAPTER    XVIII 

CAUSES    OF   FAILUEfE. 

Analysis  of  Failures 

Bradstreet's  defines  a  business  failure  as  "one  that  in- 
volves some  loss  to  creditors  or  individuals,  firms,  or  cor-  ^ 
porations  engaged  in  ordinary  commercial  operations'* ;  and 
the  very  interesting  and  instructive  statistics  compiled, 
covering  a  period  of  about  thirty  years,  deal  with  strictly 
commercial  insolvencies,  excluding  insolvencies  of  non- 
commercial individuals,  bucket-shops,  and  professional  men. 

In  order  to  emphasize  the  importance  of  securing  full 
and  complete  information  on  a  credit  risk,  particularly  as 
bearing  upon  the  capabiHties  of  the  customer  or  individuals 
of  the  firm,  it  is  v^ell  to  consider  the  causes  of  failure. 
These  causes,  v^ith  the  percentages  of  failures  due  to  each, 
are  as  foUov^s,  according  to  the  Bradstreet  tables : 

Class  A — Due  to  Faults  of  Those  Failing 

Incompetence  (irrespective  of  other  causes).. .  29.4% 

Inexperience  (v^ithout  other  incompetence)  .  .  .  4.8% 

Lack  of  capital 29.5% 

Unvv^ise  credits ,. . 2.3^ 

Neglect  of  business  (due  to  doubtful  habits)  . .  2.0% 

Speculation  (outside  of  regular  business) 1.0% 

Personal  extravagance. .7% 

Fraudulent  disposition  of  property 10.7% 

Total 80.4% 

181 


1 82  INSOLVENCY 

Class  B — Not  Due  to  Faults  of  Those  Failing 

Specific  conditions  (disaster,  etc.) i5-9% 

Competition 2.1% 

Failure  of  others  (of  apparently  solvent  debtors)    1.6% 

Total 19.6% 

It  is  interesting  to  observe  that  for  the  six  years  from 
1908  to  19 1 3  inclusive,  with  very  slight  variations j  about 
80  per  cent  of  the  failures  are  attributed  to  the  "faults  of 
those  failing,"  while  about  20  per  cent  are  classed  under 
causes  apparently  beyond  their  control.  It  also  appears 
that  for  a  period  of  four  years,  of  the  average  number  fail- 
ing about  95  per  cent  had  very  moderate  credit  or  none  at 
all,  and  about  4.3  per  cent  had  good  credit,  and  but  7/10 
of  I  per  cent  had  very  good  credit  or  higher. 

Thus,  to  express  the  situation  in  a  compact  form,  95 
per  cent  of  those  failing  are  "off-rated,"  and  80  per  cent  of 
those  who  fail,  do  so  on  account  of  their  own  faults  or 
short-comings. 

Incompetence 

In  the  consideration  of  a  credit,  one  should  keep  in 
mind  the  causes  of  failures.  It  would  appear  that  the 
credit  man  can,  to  some  extent,  avoid  a  loss  by  securing 
complete  and  accurate  information  regarding  the  faults  of 
the  average  debtor  as  outlined  under  Class  A ;  or  at  least  he 
can  procure  such  information  as  will  enable  him  to  judge  to 
what  extent  a  risk  is  menaced  by  the  faults  showing  the 
larger  percentages.  For  example,  incompetence  is  shown 
in  overbuying  and  unwise  selections  of  stock;  carelessness 
in  keeping  or  displaying  stock;  the  perverse  adherence  to 
antiquated  ideas,  and  an  unwillingness  to  adopt  modern 
merchandise  methods  of  approved  efficiency;  and  in  care- 


CAUSES    OF    FAILURE  183 

lessness  in  handling  employees,  thereby  encouraging  theft. 
If  any  of  these  factors  of  failure  exist,  they  may  be  ascer- 
tained by  personal  interviews  with  the  merchant,  or  through 
the  salesman,  or  by  correspondence  with  the  proper  persons 
in  the  vicinity.  The  credit  man  may  therefore  protect  him- 
self in  the  first  place  as  thoroughly  as  possible,  and  then  by 
watching  the  clearance  reports  of  the  agencies  and  noting 
constantly  the  changes  due  to  such  faults,  he  may  be  able 
to  get  from  under  a  risk  before  the  ultimate  failure. 

Lack  of  Capital 

Lack  of  capital,  although  it  stands  high  in  the  percentage 
table,  is  not  by  any  means  the  greatest  single  cause  of  fail- 
ure. It  is  usually  when  coupled  with  incompetence  or  inex- 
perience that  it  brings  disaster. 

Therefore,  where  a  lack  of  capital  is  apparently  the  chief 
weakness,  the  credit  man  must  search  diligently  for  any 
other  faults  that  affect  the  character  of  the  risk.  Neglect, 
for  example,  including  as  it  does,  all  manner  of  doubtful 
habits,  while  it  is  in  itself  the  cause  of  but  2  per  cent  of  the 
total  failures,  would  be  a  very  serious  factor  when  coupled 
with  lack  of  capital.  This  is  also  true  of  the  other  faults, 
which  show  small  percentages. 

Lack  of  capital  should  not  only  be  considered  in  connec- 
tion with  the  other  faults  enumerated  under  Class  A,  but 
also  in  connection  with  the  causes  of  failure  in  Class  B,  in 
so  far  as  the  credit  man  is  able  to  ascertain  them  through  a 
study  of  conditions  in  the  locality  of  the  risk. 

In  these  days  of  sharp  competition  the  jobber  of  general 
merchandise  is  fighting  to  increase  his  volume  of  sales — this 
so  that  he  may  purchase  his  goods  in  larger  quantities  and 
thereby  secure  lower  prices  and  a  resulting  lower  percentage 
cost  of  doing  business.  Therefore  the  constructive  credit 
man  always  welcomes  the  new  customer,  and  even  when  he 


l84  INSOLVENCY 

lacks  capital,  if  he  has  ability  to  compensate  for  this  lack  of 
capital.  There  are  many  cases,  especially  in  the  South, 
where  jobbers  have  attained  a  high  degree  of  prosperity 
simply  by  building  up  the  small-capital  retail  trade  and 
thereby  creating  an  outlet  for  their  goods. 

Neglect,  Speculation,  and  Extravagance 

Neglect,  speculation,  and  extravagance  are  what  might 
be  termed  ascertainable  faults,  in  that  they  show  them- 
selves so  plainly.  As  causes  of  failure,  these  factors  have 
been  put  before  the  business  world  in  so  strong  a  light  that 
the  percentage  of  failures  due  to  them  has  been  actually  and 
greatly  reduced.  In  fact,  the  average  merchant  learned 
long  ago  that  such  faults  will  not  be  countenanced  by  the 
careful  credit  man  of  to-day.  In  the  old  days  it  was  cus- 
tomary to  say,  "Honesty  is  the  best  policy,"  but  in  the 
modern  revised  version  this  adage  appears,  "Honesty  is  the 
only  policy  allowed." 

Fraud 

It  is  to  be  regretted  that  a  high  percentage  of  failures 
are  due  to  fraud.  Is  it  that  the  moral  foundations  of  busi- 
ness are  weakening  through  the  apparent  tendency  of  the 
public  to  condone  the  offenses  of  those  high  in  business 
circles  ?  Is  it  because  the  public  has  been  educated  to  see  a 
line  of  demarcation  between  "high  finance"  and  old- 
fashioned  theft?  The  solution  appears  rather  to  lie  in  the 
apathy  of  -the  credit  men  themselves  toward  those  un- 
scrupulous merchants  who  profit  by  fraudulent  failures. 
Usually  the  other  creditors  drop  out  of  the  fight  when  they 
see  one  creditor  taking  the  lead  and  attempting  to  uncover 
the  fraud  and  to  bring  the  offender  to  justice.  The  one 
creditor  then  argues  that  time  is  too  valuable,  court  pro- 
ceedings and  lawyers  too  costly,  and  laws  too  uncertain  to 


CAUSES    OF    FAILURE  185 

justify  him  in  conducting  the  fight  single-handed,  and  the 
fraudulent  debtor  escapes. 

Fraud  is  also  made  popular  because  of  the  frequent  com- 
promise between  debtors  and  creditors.  Sometimes  when 
a  fraudulent  debtor  realizes  he  is  caught,  his  attorney  offers 
to  pay  a  sum  wherewith  to  swell  the  assets  and  increase  the 
dividend,  and  the  creditors  usually  accept  the  proposition. 
How  much  better  it  would  be  in  the  long  run  if  no  such  com- 
promises were  accepted  in  fraudulent  cases,  and  if  every 
such  debtor  were  prosecuted  vigorously  until  convicted.  As 
evidence  that  this  is  practicable,  the  very  excellent  work  of 
the  Jewelers'  Board  of  Trade  in  the  persistent  prosecution 
of  fraud  may  be  cited. 

If  the  credit  men  of  the  country  have  not  the  time  to 
devote  to  this  matter,  would  it  not  be  highly  profitable  to 
combine  in  some  way  for  the  prosecution  of  fraudulent 
failures?  The  National  Association  of  Credit  Men  has 
been  working  to  establish  a  fund  exclusively  for  this  pur- 
pose, but  from  all  points  has  arisen  the  question:  "How 
much  shall  we  get  for  our  share  in  this  fund?"  or,  "How 
much  will  you  spend  in  our  neighborhood  ?"  The  plan  will 
be  worked  out  eventually,  but  the  menace  of  fraud  is  a 
present  one  and  will  continue  until  the  means  are  devised  to 
defeat  it. 

Failures  from  Disaster  and  Competition 

In  the  consideration  of  the  causes  of  failure  listed  under 
Class  B,  the  treatment  is  to  some  extent  merely  a  matter  of 
theory.  The  relatively  large  percentage  of  failures  caused 
by  "specific  conditions"  is  due  tO'  some  extent  to  a  conjunc- 
tion of  these  conditions  with  one  or  more  of  the  causes 
listed  in  Class  A;  for  when  severe  weather  conditions,  ad- 
verse crops,  epidemics,  or  other  catastrophes  fall  upon  a 
community  it  is  the  weaker  concerns  that  are  forced  out  of 


1 86  INSOLVENCY 

business.  The  concern  which  has  overbought  or  which  has 
sold  on  credit  far  beyond  its  capacity,  or  extended  its  opera- 
tions in  other  ways  beyond  the  limits  of  ordinary  safety,  is 
the  one  hardest  hit  by  the  calamities  included  under  specific 
conditions.  Of  course,  floods  and  cyclones  are  such  disasters 
as  might  happen  to  the  best  and  most  conservative  business 
concerns,  and  no  practical  rules  can  be  laid  down  to  guard 
against  failures  from  such  a  cause. 

It  is  almost  impossible  to  foresee  disaster  in  local  con- 
ditions ;  but  by  following  a  systematic  plan  of  investigating 
and  keeping  informed  on  fundamental  conditions  through- 
out his  territory,  the  credit  man  may  be  able  to  keep  his 
credits  so  well  in  hand  that  he  can  pull  out  from  under  a 
risk  when  disaster  is  about  to  overtake  the  customer,  or,  at 
least,  just  after  it  has  occurred. 

The  small  percentage  of  failures  given  in  the  table  under 
Class  B  as  due  to  competition,  is  surprising;  but  it  is  un- 
doubtedly a  fact  that  either  incompetence  or  lack  of  capital 
has  received  the  blame  for  many  a  failure  where  competition 
is  the  underlying  and  real  cause.  It  is  argued  that  a  man  of 
ability  will  prove  himself  capable  of  resisting  competition; 
but  all  merchants  are  not  men  of  ability,  and  it  is  usually 
to  those  already  afflicted  with  incompetence  or  inexperience 
that  competition  comes. 

It  must  be  a  source  of  gratification  to  the  credit  man, 
after  all,  that  over  80  per  cent  of  the  failures  are  due  to  the 
faults  of  those  failing.  Outside  causes  may  be  difficult  to 
foresee  and  impossible  to  guard  against,  but  the  faults  of 
those  failing,  should  be  foreseen  and  ought  to  be  guarded 
against. 


CHAPTER    XIX 

BANKRUPTCY    LAW    AND    PROCEEDINGS 

The  National  Bankruptcy  Law* 

The  National  Bankruptcy  Act  has  until  recently  been 
regarded  as  merely  a  statute,  which  it  undoubtedly  is;  but 
through  the  great  volume  of  business  adjudicated  in  the 
bankruptcy  courts  and  the  numerous  decisions  bearing  on 
almost  every  phase  of  insolvency,  there  has  developed  a 
great  system  of  jurisprudence.  Insolvency  in  its  various 
forms  and  phases  is  at  the  bottom  of  most  commercial  and 
business  litigation.  When  one  reads  the  long  list  of  legal 
actions — attachments,  executions,  garnishments,  receiver- 
ships, assignments — involving  questions  of  liens,  trusts,  and 
kindred  subjects,  this  fact  is  readily  recognized. 

It  is  a  notable  fact  that  the  study  of  bankruptcy  has 
been  greatly  neglected  by  lawyers.  Even  in  law  schools  it 
is  but  incidentally  considered.  Only  when  brought  into 
contact  with  the  law  through  an  actual  case  in  a  bank- 
ruptcy court  does  the  average  lawyer  make  any  attempt  to 
study  its  working  principles. 

The  power  to  enact  laws  relating  to  bankruptcy  is  vested 
in  Congress  by  Article  I,  Section  8,  of  the  Constitution,  and 
this  power  has  been  repeatedly  exercised.  Statutes  were 
enacted  in  1800,  1841,  1867,  1880,  and  finally  the  present 
Act,  in  1898,  but  none  of  the  laws  so  enacted  remained 
in  force  for  any  great  length  of  time  until  the  passage  of 
the  Act  of  1898.  All  of  these  acts,  comprising  the  bank- 
ruptcy law  of  our  country,  were  founded  on  the  English 
bankruptcy  law,  the  first  statute  of  which  was  enacted  in 
1542  during  the  reign  of  King  Henry  VIII.    It  is  significant 

*  For  text  of  law,  see  Appendix,  page  270. 

187 


i88  INSOLVENCY 

that  the  preamble  to  this  ancient  statute,  notwithstanding  its 
quaint  verbiage,  might  suffice  for  the  preamble  to  a  bank- 
ruptcy statute  of  the  present  day. 

Despite  the  criticism  and  opposition  to  the  present  Act, 
it  seems  to  be  in  a  fair  way  to  become  permanent,  for  the 
amendments  of  1903,  1906,  and  19 10  have  demonstrated 
that  improvements  can  be  made  without  great  difficulty, 
and  that  further  necessary  changes  wall  be  effected  when  it 
has  been  fully  demonstrated  that  such  changes  are  advisable 
and  for  the  good  of  all  concerned. 

State  Bankruptcy  Laws 

Before  the  passage  of  the  Act  of  1898,  every  state  had 
its  own  laws  regarding  the  settling  of  insolvent  estates,  but 
none  of  these  laws  insured  an  equitable  and  economical 
administration  which  would  be  fair  to  creditor  and  bank- 
rupt alike.  In  every  failure  preference  could  be  made,  and 
the  creditor  who  was  alert  or  nearest  to  the  scene  of  failure 
had  a  great  advantage  over  the  late  comer.  At  the  first 
sign  of  business  trouble  there  was  a  scramble — a  race  to  be 
in  first  at  the  death  and  to  fight  over  the  spoils.  When  a 
debtor  felt  hard  pressed,  he  was  afraid  to  consult  freely  or 
openly  with  any  of  his  creditors  because,  if  his  condition 
became  known,  someone  was  sure  to  resort  to  one  of  the 
numerous  legal  expedients  to  obtain  a  preference  over 
other  debtors  and  save  his  own  account. 

The  common  law  remedies  of  attachment  and  execution 
were  dreaded  by  creditor  and  debtor  alike.  In  some  states 
a  law  providing  for  a  general  creditors'  bill  was  enacted 
with  a  view  to  placing  all  creditors  on  an  equal  footing. 
But  all  of  these  measures  proved  inadequate  to  meet  the 
constantly  changing  conditions  growing  out  of  expanding 
business  and  its  increasing  complexities.  Practically  all  the 
remedies   gave   certain   advantages    to    the   most   diligent 


BANKRUPTCY    LAW    AND    PROCEEDINGS  189 

among  the  creditors,  and  left  the  late  comers  out  in  the 
cold.  Furthermore,  these  laws  were  not  adapted  to  the 
administration  of  insolvent  estates  where  a  great  number 
of  widely  scattered  creditors  were  involved. 

Bankruptcy  Jurisprudence 

Out  of  this  apparent  chaos  has  arisen  the  present-day 
national  bankruptcy  jurisprudence,  which  has  for  its  very 
foundation  equal  privileges  among  creditors  and  efficiency 
and  despatch  in  adjudication.  The  Act  recognizes  and  safe- 
guards the  rights  of  the  bankrupt  as  well  as  of  the  creditors. 
No  clearer  exposition  of  the  meaning  and  scope  of  the  Act 
has  been  made  than  that  given  by  Mr.  Harold  Remington,  in 
substantially  the  following  words : 

As  bankruptcy  jurisprudence  now  stands  in  the  United 
States,  it  may  be  said  to  be  a  system  of  laws  ( i )  for  taking 
possession  of  the  assets  of  an  insolvent,  either  upon  his  own 
initiative,  or  in  case  he  has  done  certain  acts  called  "acts  of 
bankruptcy,"  which  have  demonstrated  his  un worthiness  or 
incapacity  properly  to  conduct  his  business,  upon  the  initia- 
tive of  his  creditors;  (2)  for  recovering  his  assets,  including 
such  as  have  been  fraudulently  transferred  to  third  parties 
or  unfairly  to  preferred  creditors  or  have  been  seized  by 
creditors  while  the  debtor  was  insolvent;  (3)  for  selling  the 
assets  and  distributing  the  proceeds  equitably  among  his 
creditors;  and  (4)  for  granting  to  him,  in  case  he  has 
surrendered  all  his  assets  and  disclosed  to  his  creditors  in 
bankruptcy  the  truth  about  his  business,  a  discharge  from 
the  unpaid  deficit  of  his  debts. 

The  Credit  Man  and  the  Bankruptcy  Law 

If  the  credit  man  is  familiar  with  the  Act — and  it  is 
assumed  that  every  credit  man  has  studied  it — it  will  be 
noted  that  the  foregoing  statement  by  Remington  sum- 


190 


INSOLVENCY 


marizes  every  phase  of  the  bankruptcy  law.  It  must  also  be 
seen  that  a  law  concerned  with  such  a  broad  subject  must  be 
far-reaching  in  its  administration,  and  capable  of  wonderful 
development  in  the  future  evolution  of  business  methods  and 
ideas.  The  Bankruptcy  Act  is  here  to  stay,  and,  since  the 
bankruptcy  court  is  essentially  the  court  of  the  unsecured 
creditor,  it  behooves  every  credit  man  to  make  so  thorough 
a  study  of  the  subject  that  he  will  be  able  to  take  advantage 
of  every  one  of  the  provisions  which  have  been  enacted  for 
his  benefit. 

No  attempt  will  be  made  here  to  discuss  the  Act  in  its 
entirety,  but  only  those  features  which  directly  concern 
creditors  and  which  would  be  handled  by  the  credit  man 
himself  if  he  appeared  in  a  bankruptcy  court.  In  the 
appendix  of  the  present  volume  will  be  found  a  complete 
copy  of  the  Act  with  all  its  amendments ;  and  the  credit  man 
is  advised  to  familiarize  himself  with  the  entire  text  and 
especially  with  those  sections  which  refer  more  particularly 
to  the  creditor.  He  should  then  pursue  the  subject  further, 
and  study  the  various  explanations  and  decisions  in  the 
standard  works  on  bankruptcy,  such  as  Remington,  Love- 
land,  and  Collier,  one  of  which  at  least  will  be  found  in  the 
library  of  every  active  attorney. 

Involuntary  Bankruptcy 

The  credit  man  should  bear  in  mind  that  the  debtor  must 
owe  at  least  $1,000  to  permit  of  an  involuntary  petition 
being  filed  against  him,  and  the  allegation  that  such  amount 
is  owing  should  always  appear  in  the  petition  drawn  by  the 
attorney.  The  fact  is  mentioned  here  because  this  require- 
ment is  sometimes  confused  with  another  requirement — that 
the  petitioners  must  represent  at  least  three  or  more  provable 
claims  which  aggregate  not  less  than  $500. 

In  the  case  of  a  small  merchant  who  becomes  insolvent, 


BANKRUPTCY    LAW    AND    PROCEEDINGS 


191 


it  sometimes  happens  that  a  few  of  the  largest  creditors 
combine  and  seize  the  assets  of  the  debtor  and  leave  out  in 
the  cold  all  remaining  creditors,  the  total  of  whose  claims 
do  not  aggregate  the  necessary  $500.  In  this  event,  the 
remaining  creditors  cannot  ordinarily  throw  the  debtor  into 
involuntary  bankruptcy,  but  still  have  a  chance  to  share  in 
the  assets  if  they  can  induce  the  debtor  to  file  a  voluntary 
petition  in  bankruptcy.  If  they  are  unsuccessful  in  this  there 
may  be  another  way.  If  the  debtor  owes  more  than  $1,000 
and  there  are  less  than  twelve  creditors,  any  creditor  having 
a  claim  of  not  less  than  $500  can  file  an  involuntary  petition 
against  the  debtor  and  thus  throw  him  into  bankruptcy. 

Procedure  in  Bankruptcy 

In  both  voluntary  and  involuntary  bankruptcy,  schedules 
of  the  assets  of  the  bankrupt  must  be  filed,  and  such 
schedules  play  a  most  important  part  in  the  proceedings. 
They  must  contain  full  and  true  statements  of  the  assets  and 
liabilities  of  the  bankrupt ;  and  should  there  be  any  knowing 
omissions  therefrom,  or  should  any  wilful  misstatement  on 
a  material  point  appear  therein,  the  condition  may  constitute 
not  only  a  bar  to  the  bankrupt's  discharge,  but  may  also,  in 
certain  cases  and  under  certain  conditions,  constitute  a  crime 
punishable  even  to  confinement  in  a  Federal  penitentiary. 

The  Act  affords  certain  provisional  relief  while  an  in- 
voluntary petition  is  pending.  If  it  did  not,  the  bankrupt 
might  abscond;  or  he  might  dispose  of  a  portion  of  his 
assets;  or  a  third  party,  with  or  without  his  connivance, 
might  sequester  the  assets  or  otherwise  defeat  the  creditors ; 
or  the  stock  of  goods  might  be  of  a  perishable  nature,  and 
subject  to  damage  and  loss  if  not  properly  handled.  Upon 
proper  showing  being  made  to  the  judge,  or  the  referee, 
there  are  remedies  in  each  and  every  case. 

Such  important  matters  as  these  should,  of  course,  be 


192 


INSOLVENCY 


handled  by  an  attorney,  as  should  also  the  petitions  in  both 
voluntary  and  involuntary  proceedings ;  but  the  lawyer  must 
be  furnished  with  the  facts  he  requires  as  a  basis  for  action, 
and,  as  the  creditors  are  usually  in  possession  of  these  facts 
and  are  the  only  ones  who  can,  or  will,  supply  them,  the 
lawyer  is  really  dependent  upon  the  creditors.  It  is  a  mis- 
taken idea  that  the  attorney  is  everything  and  that  he  must 
be  let  alone,  for  he  can  act  only  in  so  far  as  his  knowledge 
of  the  case  will  permit.  It  is  the  duty  of  the  credit  man  to 
confer  with  the  other  creditors  and  to  assist  in  gathering 
information  with  which  the  attorney  may  proceed.  If  the 
credit  man  has  reason  to  believe  that  unfavorable  or  danger- 
ous conditions  exist  which  may  cause  a  further  loss  or 
damage  to  the  assets  of  the  insolvent  debtor,  his  attorney 
may,  upon  information,  file  a  petition  and  have  the  property 
in  the  hands  of  the  bankrupt  seized  in  the  same  manner  as 
in  case  of  an  attachment  before  judgment.  If  the  conditions 
warrant,  he  may  even  have  the  debtor  arrested  and  detained 
for  examination.  In  the  great  majority  of  bankruptcy  cases 
a  temporary  receiver  is  named  to  take  immediate  charge  of 
the  assets,  and  various  restraining  orders  are  issued.  The 
attorney  for  the  creditors,  or  their  several  attorneys,  may, 
if  they  see  fit,  start  independent  suits  as  if  bankruptcy  had 
not  intervened,  and  the  expenses  of  such  suits  be  later  reim- 
bursed to  such  creditors  out  of  the  funds  of  the  bankrupt. 

The  Petition  in  Bankruptcy 

The  actual  filing  of  the  petition  in  bankruptcy  against 
an  insolvent  debtor  is  a  simple  process,  but  the  form  of  the 
petition  itself  must  be  followed  closely  and  the  wording  must 
be  strictly  in  accordance  with  the  established  form.*  It  is 
necessary  to  allege  insolvency  and  that  the  debtor  owes  debts 
to  the  amount  of  $1,000  and  over.    The  petitioning  creditors 

*For  form  of  petition  in  bankruptcy  see  Form  ^,  Appendix. 


BANKRUPTCY    LAW    AND    PROCEEDINGS  193 

must  represent  claims  to  the  extent  of  $500  in  excess  of 
securities  held  by  them. 

There  are  certain  specific  acts  of  bankruptcy  defined  by 
the  statute,  and  the  attorney  or  adjuster  must  know  that  at 
least  one  such  specific  act  of  bankruptcy  has  been  committed. 
Some  of  these  would  not  seem  at  first  sight  to  be  legitimate 
acts  of  bankruptcy.  Thus  it  has  been  held  that  a  merchant 
making  payments  to  certain  creditors  while  he  is  insolvent, 
even  though  such  payments  are  supposed  to  be  made  in  the 
ordinary  course  of  business,  thereby  commits  an  act  of  bank- 
ruptcy in  that  he  is  preferring  such  creditors  to  the  detriment 
of  his  other  general  creditors.  The  specific  act  of  bankruptcy 
must  be  stated  plainly  and  in  as  few  words  as  possible,  so  as 
to  leave  no  doubt  of  the  facts  as  they  exist. 

If  possible,  the  petition  is  signed  by  each  of  the  petition- 
ing creditors,  or  by  the  proper  party,  who  later  makes  oath 
as  to  the  facts.  A  petition  can  be  filed  by  one  or  more 
attorneys,  who  sign  the  names  of  the  petitioning  creditors 
over  their  own  signatures,  and  later  make  oath  in  the  pre- 
scribed way.  Should  an  adjuster  or  an  attorney  represent 
three  clients,  and  it  became  necessary  to  file  a  petition  in 
haste,  he  could,  and  undoubtedly  would,  sign  the  names  of 
the  creditors  himself  without  waiting  to  send  the  petition  to 
the  different  creditors  for  their  signatures,  although  some 
attorneys  follow  this  latter  procedure. 

Filing  the  Petition 

Generally  speaking,  for  judicial  purposes  each  state  is 
divided  into  two  or  more  districts,  and  each  district  into  two 
or  more  divisions,  although  this  is  not  an  arbitrary  rule,  nor 
is  this  the  plan  in  every  state  of  the  Union.  For  example,  a 
Federal  judge  may  preside  over  the  Eastern  District  of  a 
certain  state  and  may  hold  his  court  in  three  divisions  of 
that    district,    these    being,    for    example,    the    northern, 


194 


INSOLVENCY 


southern,  and  northeastern  divisions  of  the  district.  Each 
division  comprises  a  certain  number  of  counties  of  the  state, 
which  for  convenience  are  grouped  into  this  division,  the 
court  usually  sitting  at  some  important  town  or  city  where 
a  Federal  court  building  is  located,  and  where  a  clerk  or 
assistant  clerk  of  the  court  has  a  permanent  office. 

When  the  petition  has  been  prepared,  signed,  and  duly 
attested  on  oath,  it  is  lodged  with  the  clerk  of  the  district 
court  in  the  division  in  which  the  alleged  bankrupt  resides 
or  conducts  his  business.  After  the  petition  is  lodged  with 
the  clerk  and  proper  entries  are  made,  the  petition  is  referred 
to  the  judge,  who,  if  he  approves  of  the  petition,  issues  the 
proper  orders  and  the  clerk  issues  the  subpoena  which  is 
served  by  the  United  States  marshal  or  a  designated  deputy- 
marshal. 

If,  however,  the  bankrupt  admits  his  insolvency  in  writ- 
ing and  states  his  willingness  to  be  adjudged  a  bankrupt,  in 
most  cases  the  clerk  of  the  court  immediately  refers  the 
petition  to  the  referee  in  bankruptcy,  who  issues  the  proper 
notices  to  all  creditors  and  other  parties  at  interest.  If  the 
bankrupt  accepts  and  signs  the  process  of  service,  the  duties 
of  the  marshal  are  dispensed  with  and  a  fee  of  $io  is  saved. 
When  the  petition  is  lodged  with  the  clerk  a  deposit  of  $35 
is  required  for  court  fees.  Should  the  services  of  the 
marshal  be  necessary,  then  the  fee  of  $10  must  also  be 
deposited  with  the  petition. 

The  Referee  in  Bankruptcy 

The  referee  is  appointed  for  a  period  of  two  years  and 
his  territorial  jurisdiction  is  assigned  by  the  district  judge, 
who  may  change  such  jurisdiction  at  his  discretion.  This 
brings  the  administration  of  the  bankruptcy  court  home  to 
the  people,  and  enables  the  proceedings  to  be  conducted  in 
the  county  where  the  bankrupt  resides.    After  an  insolvent 


BANKRUPTCY    LAW    AND    PROCEEDINGS  195 

debtor  is  adjudged  a  bankrupt,  the  referee  issues  to  each 
creditor  such  notices  by  mail,  at  least  ten  days  in  advance 
in  each  case,  as  will  give  him  all  necessary  information  as  to  : 

1.  All  examinations  of  the  bankrupt. 

2.  All  hearings  upon  applications  for  the  confirmation 

of  compositions,  or  proposed  compromises  of  any 
controversy. 

3.  All  meetings  of  creditors. 

4.  All  proposed  sales  of  property  and  the  rejection  or 

confirmation  of  such  sales. 

5.  The  declaration  and  time  of  payment  of  dividends. 

6.  The  filing  of  the  final  report  of  the  trustee  and  all 

matters    regarding    the    examination    of    such 
report. 

7.  The  dismissal  of  the  proceedings. 


CHAPTER    XX 

PROCEEDINGS    OF    CREDITORS 

The  Bankruptcy  Court 

It  must  be  borne  in  mind  that  bankruptcy  proceedings 
are  conducted  like  any  other  judicial  proceedings,  and  that, 
while  the  creditors  are  allowed  to  appear  and  have  votes  in 
certain  matters,  it  is  the  court  that  passes  upon  the  rights 
of  the  litigants.  A  bankruptcy  court,  even  though  it  may  be 
held  in  the  store  of  the  debtor  or  in  the  office  of  an  attorney, 
is  conducted  with  dignity,  and  the  attitude  of  the  attorneys 
is  the  same  as  in  a  high  court  of  chancery  in  its  own  court 
room. 

On  the  other  hand,  while  the  Bankruptcy  Act  prescribes 
just  what  must  be  submitted  to  the  vote  of  the  creditors,  the 
referee  very  often  consults  the  wishes  of  the  assembled 
creditors,  and  not  only  confers  with  them  and  asks  their 
advice,  but  allows  them  to  determine  certain  questions  as  to 
the  policy  of  the  trustee  in  his  administration  of  the  assets. 
The  votes  of  the  creditors  may,  however,  be  considered  as 
merely  advisory,  except  in  the  selection  of  the  trustee  or  in 
such  other  matters  as  are  specifically  defined  in  the  statute. 

In  the  same  way,  if  the  creditors  are  harmonious  and 
exhibit  an  interest  in  the  proceedings,  it  is  customary  for 
the  trustee  to  defer  in  great  measure  to  their  wishes  and 
advice,  although,  strictly  speaking,  the  creditors  have  no 
right  to  interfere  with  the  trustee,  since  his  official  actions 
are  governed  by  orders  from  the  referee. 

Filing  Creditors'  Claims 

Matters   submitted  to  creditors   at   their   meetings   are 

196 


PROCEEDINGS    OF    CREDITORS  igy 

voted  on  by  open  ballot,  and  a  decision  is  reached  by  a 
majority  vote,  determined  by  the  number  and  amount  of 
the  allowed  claims  represented  by  the  creditors  present. 
Creditors  whose  claims  have  not  been  allowed  cannot 
participate  in  the  voting.  An,  "allowed"  claim  is  one  which 
has  been  properly  filed  and  passed  upon  and  allowed  by  the 
referee,  this  with  due  consideration  for  the  nature  of  the 
debt.  For  example,  a  secured  creditor,  or  one  who  has  a 
claim  secured  in  part,  cannot  vote  in  the  selection  of  a 
trustee,  yet  he  shares  in  the  distribution  of  the  assets. 

Another  provision  as  to  claims  is,  that  to  be  entitled  to 
vote,  they  must  be  filed  with  the  referee  not  later  than  the 
day  before  the  meeting  of  creditors.*  This  gives  the  referee 
a  chance  to  examine  the  claims,  to  see  that  the  proof  of 
each  is  properly  executed,  and  that  the  other  requirements 
of  the  law  have  been  complied  with.  If  it  has  been  found 
that  the  amounts  are  correct  and  that  such  claims  are  prop- 
erly filed,  then,  unless  there  is  some  valid  objection,  the 
claim  is  said  to  be  "allowed,"  and  the  claimant  can  partici- 
pate in  the  voting.  It  is  well  to  impress  upon  the  credit  man 
right  here  that  he  should  make  it  a  point  always  to  file  his 
claim  promptly  upon  receipt  of  the  notice  of  the  first  meet- 
ing of  creditors,  or  should  direct  his  attorney  to  do  so.  This 
provision  does  not  seem  to  be  generally  understood,  but  if 
any  creditor  invokes  the  rule  of  the  court,  the  referee  may 
refuse  permission  to  vote  to  those  creditors  whose  claims  are 
filed  and  allowed  on  the  day  of  the  meeting. 

Any  creditor  having  a  provable  claim,  whether  filed  or 
not,  is  entitled  to  be  heard  in  the  meeting;  but  the  referee 
can  exercise  his  right  to  require  of  such  person  prima  facie 
proof  of  interest  in  the  claim.  Where  the  expression  "con- 
cerning a  majority  of  claims"  is  used,  it  means  a  majority  of 
the  claims  that  have  been  allowed  and  are  represented  either 


*This  is  a  rule  of  procedure  established  by  the  judges  of  many  of  the  District  Courts. 


198  INSOLVENCY 

in  person  or  by  power  of  attorney.  This,  however,  does  not 
mean  simply  a  majority  in  either  the  number  or  the  value 
of  claims,  but  takes  into  consideration  both  of  these  factors. 
That  is,  there  must  be  a  majority  in  both  the  number  of 
creditors  and  the  amount  of  claims. 

The  credit  man  may  represent  his  house  as  a  claimant, 
just  as  an  individual  creditor  may  represent  himself,  but  a 
lawyer  representing  a  creditor  must  have  a  power  of 
attorney  made  out  on  the  form  prescribed  for  that  purpose. 

Creditors'  Meetings 

The  credit  man  should  preserve  and  file  all  notices  of 
meetings  as  they  are  received  from  the  referee,  and  demand 
from  his  attorney  a  report  of  all  proceedings ;  then,  regard- 
less of  whether  he  is  present  or  not,  he  will  have  a  complete 
history  of  the  case.  Usually  it  is  impossible  for  all  the 
creditors  to  be  present  at  bankruptcy  proceedings,  especially 
if  they  are  some  distance  away,  but  in  any  event  the 
creditors  should  select  an  attorney  to  represent  them  and  to 
keep  them  thoroughly  informed  on  all  points  as  the  case 
proceeds.  Most  of  the  criticism  directed  against  the  Bank- 
ruptcy Act  by  credit  men  is  due  wholly  to  their  own  lack 
of  interest  and  their  failure  to  look  after  their  rights  as 
provided  in  the  law  itself. 

A  most  valuable  feature  of  the  bankruptcy  law  is  the 
provision  for  calling  the  creditors  together  for  the  purpose 
of  electing  a  trustee  to  administer  the  estate,  and  for  examin- 
ing the  bankrupt  and  other  witnesses.  Creditors'  meetings 
are  also  held  for  the  purpose  of  hearing  reports  of  receivers 
and  trustees,  and  at  all  such  meetings  the  privilege  is  granted 
the  creditors  of  consulting  together  and  with  the  trustee  for 
the  proper  care  and  protection  of  the  estate. 

The  first  meeting  of  creditors  must  be  held  not  earlier 
than  ten  nor  later  than  thirty  days  after  the  adjudication  in 


PROCEEDINGS    OF    CREDITORS 


199 


bankruptcy,  except  in  certain  cases  of  "mischance,"  which 
latter  situation  is  fully  covered  in  the  Act.  The  law  re- 
quires, also,  that  the  first  meeting  must  be  held  in  the  county 
where  the  bankrupt  resides  or  is  domiciled,  or  where  he  has 
his  principal  place  of  business.  Under  former  bankruptcy 
laws  the  litigants  were  compelled  to  travel  to  the  seat  of  the 
Federal  court,  and  this  at  times  entailed  much  hardship  on 
all  concerned. 

Strictly  speaking,  there  should  be  a  referee  for  each 
county,  but  this  point  is  covered  by  assigning  a  referee  to 
several  adjoining  counties,  and  he  may  comply  with  the  law 
by  maintaining  an  office  at  each  county  seat.  The  require- 
ments of  the  law  are  satisfied  if  the  first  meeting  is  held  in 
the  town  or  place  of  business  of  the  bankrupt  or  at  the 
county  seat,  or  at  any  other  town  in  the  county  where  it  is 
convenient. 

There  is  a  regular  form  of  procedure  to  be  followed  at 
the  first  meeting  of  creditors.  The  first  procedure  is  usually 
the  consideration  of  claims.  The  law  requires  that  the  bank- 
rupt shall  obey  all  orders  of  court,  and  a  failure  to  do  so 
may  be  made  the  grounds  for  opposition  to  his  discharge. 
Pursuant  to  this  authority,  the  referee  usually  orders  that 
the  bankrupt  be  present  at  the  first  meeting  to  assist  the 
court  in  the  examination  of  all  proofs  of  claims  filed  against 
the  estate.  After  the  claims  have  been  considered,  a  trustee 
is  voted  for;  and  if  no  other  business  intervenes,  the  bank- 
rupt is  then  sworn  by  the  court  and  placed  upon  the  witness 
stand  for  examination  by  the  creditors  themselves  or 
through  their  attorneys. 

Although  the  Act  directs  that  the  creditors  shall  at  each 
meeting  take  such  steps  as  may  be  necessary  for  the  best 
interests  of  the  estate,  and  though  it  is  required  that  creditors 
be  served  with  notices  of  all  meetings,  it  is  not  the  purpose 
of  the  Act  to  place  the  creditors  above  the  court.     These 


200  INSOLVENCY 

provisions  are  simply  to  give  the  creditors  standing  in  the 
court,  with  the  right  to  speak  and  to  assemble  in  court  and 
confer  together.  A  creditor  may  appear  in  person  and  may, 
under  certain  limitations  and  restrictions,  conduct  his  own 
case  in  a  court  of  bankruptcy,  where  in  a  state  court  he 
would  be  denied  such  a  privilege  and  would  be  obliged  to 
speak  through  his  attorney. 

Election  of  Trustee 

Too  much  importance  cannot  be  attached  to  the  right 
of  the  creditors  to  elect  the  trustee,  for  on  that  official  de- 
pends largely  the  successful  administration  of  the  assets.  A 
trustee  who  is  a  good  merchandise  man  as  well  as  a  capable 
business  man,  and  who  will  enter  upon  his  duties  with  a 
determination  to  conserve  the  assets  of  the  business  for  the 
best  interests  of  the  creditors,  will  accomplish  just  what  was 
intended  in  the  passage  of  the  Act. 

Under  the  old  state  laws,  the  insolvent  debtor  appointed 
his  assignee  or  trustee,  who  administered  the  estate  as  he 
thought  best;  and  the  general  creditors  had  but  little  voice 
in  the  management.  It  often  happened  that  the  debtor  and 
the  largest  creditors  had  a  tacit  understanding,  and  the  estate 
was  administered  to  the  detriment  of  the  minor  creditors. 
Under  the  present  bankruptcy  law  such  a  proceeding  is  im- 
possible, for  all  creditors  stand  upon  an  equal  footing,  and 
the  trustee  is  elected  by  the  votes  of  the  creditors  who  are 
not  preferred  and  whose  claims  are  not  secured.  Remington 
says,  "The  administration  is  essentially  an  administration 
by  general  creditors — ^by  the  unprotected  creditors.'*  Much 
of  the  adverse  criticism  of  the  bankruptcy  law  and  of  trus- 
tees in  general  has  been  caused  by  the  failure  of  creditors  to 
avail  themselves  of  their  legal  right  to  act  for  the  protection 
of  their  own  interests. 

The  Act  provides  for  one  trustee  in  some  cases,  and  for 


PROCEEDINGS    OF    CREDITORS  201 

three  trustees  in  others.  In  the  latter  event,  there  must  be  a 
concurrent  action  by  two  out  of  the  three  named  on  all 
matters  in  which  the  trustee  is  concerned.  In  voting  for  the 
trustee,  if  a  majority  in  number  of  claims  should  vote  for 
one  candidate  and  a  majority  in  amount  should  favor  a 
different  one,  the  referee  may  declare  that  there  is  no  elec- 
tion, and  he  himself  appoint  a  trustee.  He  may,  however, 
if  he  sees  fit,  allow  other  ballots  to  be  taken  or  permit  a 
change  of  votes.  If  no  creditors  appear  at  the  meeting  and 
no  voting  for  trustee  takes  place,  then  the  referee  appoints 
the  trustee. 

The  trustee  elected  by  the  creditors  is  subject  to  confirma- 
tion by  the  judge  or  referee,  but  the  choice  of  the  creditors  is 
not  to  be  disregarded  on  slight  grounds.  Should  the  referee 
disapprove  of  their  choice,  he  is  required  to  sign  an  order  to 
this  effect,  and  the  creditors  may  carry  the  decision  up  to 
the  judge  for  his  review.  The  same  is  true  of  any  decision 
given  in  the  form  of  an  order  by  the  referee.  However,  if 
the  creditors  do  not  carry  the  order  of  disapproval  up  to  the 
judge,  or  if,  after  it  has  been  carried  up,  the  judge  sustains 
the  ruling  of  the  referee,  then  a  second  election  may  be  held. 
The  referee  has  no  right  summarily  to  appoint  a  trustee 
after  he  has  disapproved  of  the  choice  made  by  the  creditors, 
and  the  creditors  must  again  be  given  the  opportunity  to 
make  a  choice.  Such  proceedings  are  of  rare  occurrence,  as 
the  referee  in  practically  all  cases  concurs  with  the  decision 
of  the  creditors. 

The  creditors  also  have  the  right  to  fix  the  amount  of 
the  trustee's  bond  after  his  election,  but  the  referee  passes 
upon  the  qualifications  of  the  surety  or  sureties. 

Duties  and  Prerogatives  of  the  Trustee 

The  office  of  trustee  is  most  important,  and  the  credit 
man  should  study  carefully  the  provisions  of  the  statute 


202  INSOLVENCY 

relating  to  the  powers,  duties,  and  other  important  features 
of  the  trustee  and  his  work. 

While  the  trustee  is  elected  by  the  creditors,  the  law  does 
not  give  them  the  right  to  dictate  to  him  in  any  respect. 
Also,  while  he  is  elected  by  the  majority  of  creditors,  he  is 
not  their  representative  particularly,  but  represents  all  the 
unsecured  creditors. 

The  authorities  on  bankruptcy  are  all  very  explicit  in 
defining  the  attitude  which  the  creditors  should  assume 
toward  the  trustee;  and  this  is  in  effect  that,  having  elected 
the  trustee,  they  are  to  stand  back  and  let  him  alone.  He  is 
supposed  to  be  thoroughly  competent  to  discharge  all  the 
prescribed  duties,  as  well  as  tO'  act  on  his  own  responsibility 
and  to  take  advice  from  counsel  when  necessary.  The  au- 
thorities further  state  that  creditors  should  not  be  allowed 
to  nominate  a  committee  to  supervise  the  trustee,  and, 
furthermore,  that  they  should  not  elect  an  attorney  for  him. 
The  reasons  for  such  policy  toward  the  trustee  are  plain,  and 
are  based  on  the  assumption  that  a  trustee  elected  by  the 
creditors  is  competent  to  act  for  himself.  All  of  this  is 
correct  in  theory  and  is  doubtless  good  law;  but  it  is  not 
always  possible  to  procure  a  man  to  act  as  trustee  who'  is 
so  thoroughly  qualified  to  fill  the  position  that  he  can  handle 
the  estate  as  well,  or  better,  than  several  good  business  men, 
such  as  may  almost  always  be  found  in  the  ranks  of  the 
credit  men  of  the  country. 

While  the  law  does  not  permit  the  creditors  to  dictate  to 
the  trustee  in  any  way,  they  may,  by  the  exercise  of  tact, 
influence  to  a  great  extent  the  policy  of  the  trustee  in  the 
administration  of  the  estate,  and  may  at  the  same  time 
procure  the  assistance  and  co-operation  of  the  bankrupt. 
Of  course,  the  creditors  must  do  anything  of  this  kind  in 
the  right  way  and  usually  in  the  presence  of  the  referee, 
who  should  always  see  that  an  estate  is  handled  to  the  best 


PROCEEDINGS    OF    CREDITORS  203 

advantage.  The  referee  must  necessarily  be  positive  at  all 
times  in  the  maintenance  of  his  dignity  and  rights,  and 
allow  no  interference  with  his  court  or  its  officers ;  but  if  a 
creditors'  committee  or  any  one  of  the  creditors  can  bring  to 
his  attention  matters  that  will  assist  the  trustee  in  handling 
the  estate,  they  are  usually  given  courteous  and  proper  con- 
sideration. A  referee  under  no  circumstances  should  allow 
any  suggestion  or  interference  that  would  not  be  for  the 
best  interests  of  all  the  creditors;  and  while  he  might  con- 
sider verbal  suggestions  from  creditors  in  open  meetings,  it 
is  the  customary  practice  in  bankruptcy  jurisprudence  to  re- 
quire these  suggestions  in  the  form  of  regular  petitions  from 
the  attorney  in  behalf  of  the  creditors  he  represents. 

The  creditors  should,  of  course,  see  that  the  trustee  does 
not  employ  counsel  representing  interests  adverse  to  the 
general  estate,  and,  in  general,  should  keep  careful  watch 
over  the  entire  proceedings. 


CHAPTER    XXI 

CLAIMS 
Proof  of  Claim 

One  of  the  earliest  proceedings  at  the  first  meeting  of 
creditors  is  the  allowance  or  disallowance  of  claims.  A 
creditor  is  allowed  to  prove  and  file  his  claim  direct  with 
the  court,  thereby  saving  any  expense  except  the  small  fee 
charged  by  the  notary  for  administering  the  oath  and 
attaching  his  signature  and  seal.  The  preparation  of  the 
proof  of  claim  is  a  matter  for  great  care,  as  it  represents 
both  the  pleadings  and  the  evidence  of  the  creditor,  and  as 
such  places  his  case  for  him  before  the  court. 

The  Supreme  Court  has  prescribed  a  certain  form  to  be 
used  in  proving  claims  against  a  bankrupt  estate — a  form 
familiar  to  all  credit  men  who  have  had  dealings  with  the 
bankruptcy  court.  In  all  cases  the  form  prescribed  by  the 
Supreme  Court  must  be  followed — a  matter  of  no  particular 
difficulty,  since  such  forms  are  now  printed  and  can  be  ob- 
tained from  any  stationery  or  office  supply  store.  There 
are,  however,  certain  important  points  to  be  observed  in 
filling  the  blank,  and  the  credit  man  must  exercise  care, 
lest,  for  technical  reasons,  the  claim  be  returned  by  the  court 
for  correction.  Where  a  claim  is  returned  for  correction, 
the  creditor  might  not  be  able  to  participate  in  the  voting  for 
trustee. 

The  Affidavit 

As  one  of  the  first  requirements  in  proving  a  claim,  the 
title  of  the  case  and  that  of  the  court  must  be  correctly 
stated  in  the  heading  of  the  affidavit.  The  lists  of  guar- 
anteed attorneys  furnished  by  the  bonding  companies  show 

204 


CLAIMS 


205 


the  divisions  and  subdivisions  of  each  state  for  bankruptcy 
cases,  the  counties  in  which  petitions  are  returnable  to  such 
divisions,  and  the  towns  where  the  Federal  court  may  sit. 
Some  of  these  lists  contain  as  well  the  names  of  the  referees 
in  bankruptcy.  Such  lists  may  also  be  found  in  the  rating 
books  of  the  commercial  agencies  under  "Classified  Informa- 
tion" relating  to  the  respective  states  and  territories,  and 
in  the  Credit  Men's  Diary  of  the  National  Association  of 
Credit  Men. 

The  specific  amount  of  the  claim  must  be  set  forth,  and 
the  claimant  must  aver  that  such  amount  is  justly  owing 
by  the  bankrupt.  In  the  case  of  a  running  account  of 
several  items,  the  average  due  date  is  to  be  stated.  If  such 
date  is  not  given,  the  referee  need  not  compute  the  interest 
on  the  claim,  and  dividends  on  the  principal  only  will  be 
paid.  In  the  case  of  notes,  interest  is  computed  only  to  the 
date  of  filing  the  bankruptcy  petition.  Where  interest  is 
added  to  the  face  of  a  note  which  falls  due  later  than  the 
date  of  the  petition,  the  referee  would  probably  instruct  the 
creditor  to  rebate  the  interest  to  that  date.  If  a  note  has 
been  taken  for  the  claim  or  any  part  of  the  claim,  the  note 
must  be  attached  to  the  claim  as  an  original  exhibit,  to  form 
part  of  the  court  record.  The  affidavit  must  always  state 
whether  a  judgment  has  been  taken,  and  any  such  judgment 
must  be  described. 

After  the  claim  has  been  allowed  or  disallowed,  the 
referee  at  his  discretion  may  permit  a  note  to  be  removed 
from  the  file,  provided  a  copy  is  substituted.  Such  removal 
is  sometimes  necessary  where  a  note  is  required  as  evidence 
in  a  pending  suit ;  or  the  creditors  may  desire  to  obtain  evi- 
dence of  the  legality  of  the  note  itself,  or  prove  the  number 
or  the  genuineness  of  signatures.  Where  a  note  has  been 
lost,  a  certain  form  of  proof  of  such  note  may  be  substituted, 
upon  application  to  the  referee  and  by  his  order. 


2o6  INSOLVENCY 

Consideration  for  Claim 

The  affidavit  must  set  forth  plainly  the  consideration  for 
the  claim.  While  some  referees  allow  claims  which  state 
"for  goods,  wares,  and  merchandise  sold,"  such  claims  must 
be  accompanied  by  itemized  invoices.  In.  order  that  the 
work  of  the  credit  department  may  be  lessened  and  the 
provisions  of  the  Act  fully  carried  out  in  this  respect,  it  is 
well  to  state  in  the  space  in  the  proof  of  claim  blank  pro- 
vided for  this  purpose,  that  the  consideration  for  the  claim 
is  dry  goods,  or  hardware,  or  notions,  etc.,  as  the  case  may 
be.  If  there  has  been  only  one  shipment,  the  bill  may  be 
itemized  and  attached  to  the  claim  as  an  exhibit;  but  if 
there  is  a  running  account,  such  account  must  be  fully 
itemized  on  the  statement,  as  the  court  will  not  allow  a 
statement  to  read  merely  "Account  rendered"  or  "Balance 
due."  If  there  is  an  intimation  that  the  account  will  be 
contested  either  by  the  bankrupt  or  by  another  creditor,  it 
might  be  well  to  itemize  the  statement  fully  and  support  it 
by  certified  copies  of  the  original  invoices  together  with  bills 
of  lading  or  other  indisputable  evidence  of  shipment  or 
delivery. 

Secured  Claims 

If  a  claim  is  secured,  not  only  must  this  fact  be  stated 
in  the  proof,  but  the  character  of  the  security  must  be  de- 
scribed. In  preparing  a  claim  based  on  negotiable  com- 
mercial paper,  there  are  so  many  legal  questions  involved 
and  so  many  might  arise  that  it  is  always  well  to  have  the 
assistance  of  an  attorney. 

Assigned  Claims 

Cases  often  arise  where  claims  have  been  assigned  for 
value.  If  a  claim  has  been  thus  assigned  before  bankruptcy, 
the  assignee  as  owner  of  the  claim  makes  the  proof  and  sets 


CLAIMS 


207 


forth  the  fact  that  he  is  the  owner.  If,  however,  the  claim 
has  been  assigned  after  bankruptcy  but  before  it  has  been 
filed  with  the  bankruptcy  court,  the  claimant  must  make 
affidavit  in  the  regular  way  and  must  support  his  own 
affidavit  by  that  of  the  assignor  who  owned  the  claim  at 
the  commencement  of  bankruptcy  proceedings.  This  addi- 
tional affidavit  must  set  forth  the  facts  of  the  transfer,  the 
consideration  therefor,  and  must  describe  the  security  if  any 
exists.  Claims  may  be  assigned  after  filing,  but  the  referee 
will  always  require  full  information  as  to  the  nature  and 
good  faith  of  the  transaction.  He  may  allow  any  such 
transfer  at  his  discretion ;  but  before  final  acceptance  he  will 
issue  a  ten  days'  notice  to  the  original  creditor  who  filed 
the  claim  to  appear  in  court  and  deny  the  assignment  if  it 
should  prove  fraudulent. 

Who  May  Make  Affidavit  and  Claims 

The  proof  of  a  claim  must  be  made  by  the  creditor  under 
oath,  though  in  case  he  has  conscientious  scruples  against 
swearing,  proof  may  be  made  by  affirmation.  The  oath  may 
be  taken  before  any  officer  authorized  to  administer  oaths 
in  either  a  state  or  Federal  court,  but  as  a  matter  of  con- 
venience it  is  usually  taken  before  a  notary  public.  If  the 
creditor  is  doing  business  in  his  own  name  he  can  make  the 
affidavit  in  person,  but  in  case  of  a  partnership  the  proof  of 
debt  must  show  that  it  is  made  by  one  of  the  partners. 
Provision  is  also  made  whereby  an  agent  may  make  the 
proof,  but  the  affidavit  must  state  the  reason  why  the  claim- 
ant did  not  make  it  in  person,  and  it  must  show  the  agent's 
authority  and  that  he  has  knowledge  of  the  facts.  Al- 
though it  is  often  necessary  for  proof  to  be  made  by  an 
agent,  there  must  be  a  good  and  sufficient  excuse  for  this, 
satisfactory  to  the  court.  For  instance,  the  mere  fact  that 
the  claimant  is  absent  from  the  city  would  not  be  held  as  a 


2o8  INSOLVENCY 

sufificient  excuse.  It  would  be  necessary  to  show  that  the 
claimant  was  not  only  absent,  but  that,  even  though  using 
due  diligence,  it  would  be  impossible  for  him  to  execute  and 
file  the  proof  within  the  time  allowed  by  law. 

Affidavit  to  Corporation  Claim 

If  the  claimant  is  a  corporation,  the  proof  is  made  by  the 
treasurer,  who  must  state  in  the  beginning  of  the  form  his 
relation  to  the  corporation,  viz.,  that  he  is  "Treasurer  of 
The  John  Doe  Co.,  a  corporation  incorporated  by  and  exist- 
ing under  the  laws  of  the  State  of  ....  ,  etc."  If  the  cor- 
poration has  no  treasurer,  the  proof  is  made  by  the  officer 
whose  duties  are  most  nearly  related  to  those  of  a  treasurer, 
and  this  fact  must  be  stated.  In  the  case  of  a  national  bank, 
the  cashier  would  be  the  proper  officer  to  make  the  proof. 

Frequently  when  a  corporation  is  a  claimant,  the  error 
is  made  of  signing  the  corporate  name  to  the  affidavit,  as, 
for  example,  "The  John  Doe  Co.  by  Richard  Roe,  Treas- 
urer." This  is  improper  because  it  apparently  represents 
the  oath  of  a  corporation — a  manifest  impossibility,  since  a 
corporation  cannot  be  sworn  nor  can  it  be  put  in  jail  for 
perjury  or  contempt.  The  idea  that  a  corporation  is  a 
person  is  the  cause  of  this  error;  and  in  view  of  the  fact 
that  many  difficult  questions  arise  in  bankruptcy  through  the 
differences  existing  between  corporations  and  individuals, 
it  is  well  for  the  creditor  to  gain  a  clear  understanding  of 
how  the  corporation  is  regarded  in  law: 

What  Debts  May  Be  Proved? 

In  Chapter  VII,  paragraph  63,  of  the  Bankruptcy  Act, 
it  is  stated  specifically  just  what  claims  constitute  "provable 
debts."  This  section  of  the  law  should  be  studied  with 
special  care  by  the  credit  man,  since  it  involves  many  ques- 
tions which  arise  in  every  case  of  bankruptcy.    Judgments, 


CLAIMS 


209 


taxes,  court  costs,  and  contract  claims  (the  latter  including 
open  accounts)  are,  in  reality,  the  only  claims  that  may  be 
proved  in  bankruptcy  and  allowed  to  participate  in  the  pro- 
ceedings and  share  in  the  dividends.  It  often  happens, 
however,  that  the  bankrupt  has  been  sued  for  damages ;  but 
a  claim  on  such  ground  would  be  indefinite  unless  the  suit 
were  reduced  to  judgment. 

Also,  on  the  side  of  the  bankrupt,  it  is  a  common  occur- 
rence to  find  claims  against  transportation  companies,  or  to 
find  that  he  has  started  one  or  more  damage  suits  which 
have  not  been  reduced  to  judgments  at  the  time  of  his 
adjudication.  Any  such  claims  are  regarded  as  a  part  of 
the  assets  which  belong  to  the  creditors.  When  there  are 
such  claims  the  trustee  assumes  charge  of  them,  and  at  his 
discretion  compromises  or  prosecutes  them,  subject  to  the 
approval  of  the  referee.  It  is  well  for  the  credit  man  to 
bear  this  constantly  in  mind  and  see  that  the  bankrupt  is 
examined  as  to  all  possible  claims  of  this  kind. 

In  considering  whether  a  claim  is  provable  or  not,  the 
idea  must  not  be  entertained  that  because  a  claim  is  not 
readily  provable  it  is  not  a  valid  one.  Any  claims  against 
the  bankrupt  or  his  estate  must  be  reduced  to  such  form  as 
shall  comply  with  the  requirements  of  the  statute,  but  the 
matter  of  provable  debts  and  contingent  claims  is  frequently 
the  subject  of  much  litigation,  and  any  claim  that  might 
obtain  against  the  bankrupt  or  his  estate,  which  is  not  readily 
provable  under  the  regular  form,  should  be  submitted  to  the 
claimant's  attorney  and  be  handled  by  him. 

Filing  Claims 

It  is  expected  that  all  claims  in  bankruptcy  will  be  filed 
as  soon  after  adjudication  as  possible.  They  must  be  filed 
within  a  year  from  the  date  of  adjudication.  Claims  may 
be  filed  by  the  creditor  with  the  clerk  of  the  Federal  court 


2IO  INSOLVENCY 

or  with  the  referee,  either  directly  or  through  an  attorney. 
When  the  filing  is  to  be  handled  by  an  attorney,  his  name 
should  be  inserted  in  the  space  provided  in  the  proof  of 
claim  for  that  purpose.  This  confers  upon  the  attorney 
power  to  represent  the  creditor.  When  the  claim  is  filed 
direct,  a  separate  power  of  attorney  may  be  given  to  some 
individual  to  attend  the  creditors'  meetings  in  the  interest 
of  the  claimant  if  he  cannot  attend  himself. 

The  Act  gives  the  creditors  the  right  to  file  claims  with 
the  referee  and  share  in  the  dividends  without  incurring  the 
expense  of  an  attorney,  and  in  many  cases  this  is  the  correct 
procedure.  If,  however,  fraud  is  suspected  or  preferences 
exist,  the  credit  man  should  not  merely  file  his  claim  and  let 
the  matter  rest  there  in  order  to  save  an  attorney's  fee. 
Whenever  the  credit  man  thinks  that  a  case  should  be 
thoroughly  investigated,  and  he  cannot  attend  to  this  in 
person,  he  should  either  join  with  other  creditors  in  employ- 
ing an  attorney,  or  himself  employ  an  attorney  to  examine 
the  bankrupt  and  endeavor  to  uncover  any  fraud  or  preferen- 
tial payments  which  should  be  brought  to  the  attention  of 
the  referee. 


CHAPTER    XXII 

THE    BANKRUPT 

Examination  of  the  Bankrupt 

The  Bankruptcy  Act  is  essentially;  the  law  of  the  busi- 
ness man;  and  if  he  does  not  avail  himself  of  his  rights 
under  its  provisions,  he  has  himself  alone  to  blame.  The 
referee  cannot  act  for  him,  as  the  referee  is  a  judge  of  the 
court,  and  it  is  not  his  place  to  develop  a  case  of  fraud  for 
the  benefit  of  the  creditors.  It  is  therefore  incumbent  upon 
the  creditors  themselves  to  make  out  their  case  and  establish 
the  fact  of  fraud  or  preferences,  if  such  exist. 

The  law  recognizes  the  rights  of  the  bankrupt,  even  to 
paying  out  of  the  funds  of  the  estate  the  fees  of  his  counsel 
and  his  expenses  when  attending  meetings  distant  from  his 
place  of  residence.  His  rights,  therefore,  will  be  well  looked 
after,  and  it  is  almost  always  best  for  the  creditor  or 
creditors  to  be  represented  at  the  examination  by  an  attorney 
who  is  thoroughly  conversant  with  bankruptcy  law,  and  who 
will  ''fight"  a  case  to  the  bitter  end.  The  first  meeting  of 
creditors  in  particular  is  most  important,  and  the  examina- 
tion of  the  bankrupt  here  should  be  thorough.  The  credit 
man  is  not  often  competent  to  conduct  an  examination  of, 
or  to  cross-question,  the  bankrupt,  but  he  can  and  should 
secure  evidence  and  furnish  facts  to  his  attorney  as  a  basis 
for  such  examinations. 

The  examination  of  the  bankrupt  has  been  referred  to 
several  times  as  a  matter  of  great  importance  to  the 
creditors,  and  it  might  be  interesting  to  note  that  provision 
for  such  an  examination  has  been  made  a  feature  of  every 
bankruptcy  statute  since  the  time  of  Henry  VHI.     The 

211 


212  INSOLVENCY 

present  Act  provides  that  even  if  a  creditor  has  not  filed  his 
claim  at  the  time  of  the  first  creditors'  meeting,  he  may  be 
allowed  to  examine  the  bankrupt,  although  the  referee 
usually  requires  some  proof  that  the  creditor  really  possesses 
a  bona  -fide  claim  against  the  estate.  If  the  examination  of 
the  bankrupt  cannot  be  completed  on  the  day  of  the  first 
meeting  of  creditors,  the  meeting  is  adjourned  by  the  referee 
to  another  date,  on  which  the  examination  is  continued. 

If  at  any  time  other  than  at  the  first  meeting  or  an 
adjourned  meeting,  an  examination  of  the  bankrupt  is  de- 
sired and  approved  by  the  referee,  order  is  entered  by  the 
referee  and  ten  days'  notice  given  to  all  creditors.  The 
bankrupt  may  be  examined  in  this  way.  as  many  times  as 
the  court  may  order,  and  may  even  be  examined  after  he  has 
received  his  discharge.  The  Act  specifically  provides  that 
the  wife  of  the  bankrupt  may  also  be  required  to  appear  and 
be  examined  as  to  certain  phases  relating  to  matters  of 
business  concerning  both  her  husband  and  herself. 

An  examination  may  be  held  at  any  place  where  the 
creditors  and  the  bankrupt  can  attend,  but  the  bankrupt  can- 
not be  compelled  to  attend  for  examination  at  a  place  more 
than  one  hundred  and  fifty  miles  from  his  home  or  place  of 
business,  unless  so  ordered  by  the  court  for  special  causes 
shown. 

A  bankrupt  may  be  arrested  and  held  for  examination 
if  it  can  be  shown  that  he  is  about  to  leave  the  district  where 
he  resides,  or  that  he  is  leaving  the  district  to  avoid  examina- 
tion, and  that  his  departure  will  defeat  the  proceedings  in 
bankruptcy.  If  at  the  time  set  for  the  examination  the 
bankrupt  be  in  prison,  he  may  be  brought  before  the  court 
by  the  jailor.  Every  contingency  is  provided  for  in  the 
Act,  and  it  is  doubtful  if  any  circumstances  could  arise 
whereby  the  bankrupt  could  escape  examination  if  it  could 
be  shown  to  the  court  that  such  examination  was  necessary. 


i 


THE    BANKRUPT 


213 


Rights  of  the  Bankrupt 

On  the  other  hand,  the  rights  of  the  bankrupt  are  re- 
spected. The  Act  provides  that  "no  testimony  given  by 
him  shall  be  offered  in  evidence  against  him  in  any  criminal 
proceedings."  This  section  of  the  Act  is  hardly  understood 
by  the  average  layman,  as  he  does  not  see  why  a  bankrupt 
should  not  meet  with  punishment  for  any  criminal  act  which 
might  be  disclosed  by  his  testimony.  The  reason  for  this 
rule,  however,  is  sound,  being  found  in  the  provision  of  the 
Constitution  that  "no  person  ....  shall  be  compelled  in 
any  criminal  case  to  be  a  witness  against  himself." 

If,  however,  the  bankrupt  has  purposely  made  a  false 
statement  in  writing  to  one  of  his  creditors,  and  admits  this 
in  his  examination,  is  there  no  way  in  which  he  can  be 
brought  to  account?  How  far  will  the  constitutional  pro- 
vision protect  him?  This  is  so  important  a  point  that  it 
may  be  well  to  quote  from  an  authority:  "It  can  have  no 
other  effect  than  to  protect  the  bankrupt  against  the  use  of 
his  testimony  in  any  prosecution  in  the  courts  of  the  United 
States.  It  would  be  no  answer  to  a  prosecution  which 
might  be  instituted  in  the  state  courts,  which  are  not  created 
by  acts  of  Congress  and  which  prescribe  their  own  rules  of 
proceeding  independently  of  Congress."* 

It  must  be. borne  in  mind  that  any  examination  of  the 
bankrupt  must  be  in  the  interest  of  the  creditors  and  must 
be  conducted  by  the  creditors  or  their  attorneys  and  under 
the  supervision  of  the  referee,  and  that  an  examination  for 
mere  malice,  or  out  of  curiosity,  will  not  be  allowed.  Within 
these  limits  the  most  searching  examination  may  be  held  and 
the  questions  must  be  answered.  From  the  fact  that  such 
examinations  are  sometimes  quite  extended  and  cover  so 
many  topics  (and  likewise  so  many  pages  of  the  record 
which  amount  to  nothing  in  the  end),  they  have  been 


*Loveland  on  Bankruptcy. 


214 


INSOLVENCY 


referred    to    in    decisions    by    various    learned    courts    as 
"fishing  excursions." 

Duty  of  the  Bankrupt 

If  a  bankrupt,  properly  summoned,  refuses  to  appear  or 
fails  to  produce  books  or  records,  or  refuses  to  answer  any 
questions  when  ordered  to  do  so  by  a  referee,  the  matter  is 
brought  to  the  attention  of  the  judge  upon  application  to 
commit  the  bankrupt  to  jail  for  contempt  of  court.  If  the 
witness  makes  an  unsatisfactory  answer,  or  one  which  is 
untrue,  or  if  he  answers  evasively,  the  court  may  commit 
him  for  contempt. 

''Thus,  where  the  bankrupt,  by  answers  of  'I  don't  know' 
and  'What  do  you  mean  ?'  given  in  response  to  questions  on 
matters  with  which  he  must  have  been  familiar,  in  effect 
refuses  to  disclose  information  which  would  enable  the 
trustee  to  follow  his  property,  an  order  is  proper  for  adjudg- 
ing him  in  contempt  of  court  for  refusing  to  answer  ques- 
tions and  for  concealing  from  his  creditors  material  facts 
as  to  his  property.  It  is  immaterial  that  he  was  adjudged  in 
contempt  before  the  conclusion  of  his  direct  testimony  and 
before  he  was  cross-examined."* 

The  duty  of  the  bankrupt,  in  general,  is  to  answer  truth- 
fully, connectedly,  and  fully,  to  the  extent  that  his  mental 
equipment  will  allow,  all  questions  put  to  him ;  and  should  he 
withdraw  from  the  office  of  the  referee  before  the  comple- 
tion of  his  examination,  he  may  be  punished.  It  has  been 
shown  that  a  bankrupt  may  be  prosecuted  in  the  state  courts 
if  he  has  given  testimony  that  incriminates  him ;  but  a  state 
court  has  no  jurisdiction  to  punish  a  party  for  perjury,  as 
such  punishment  is  provided  for  in  the  Bankruptcy  Act 
itself,  and  such  offenses,  therefore,  come  under  the  jurisdic- 
tion of  the  Federal  courts. 


'In  re  Schulman,   177  Fed.  Rep.   191. 


THE    BANKRUPT  215 

Fraudulent  Statements 

Many  of  the  states  have  laws  making  the  giving  of  a 
false  statement  for  the  purpose  of  procuring  credit,  a 
felony;  but  it  is  difficult  to  procure  the  information  neces- 
sary to  lay  before  a  grand  jury  and  procure  an  indictment 
for  false  pretense.  To  indict  it  is  incumbent  on  the  creditor 
to  show  beyond  question  that  the  statement  itself  is  false 
to  a  material  extent;  that  it  was  made  for  the  purpose  of 
obtaining  credit;  that  certain  goods  to  a  certain  amount 
were  shipped  on  the  strength  of  such  statement;  and  that 
the  debtor  did  knowingly  falsify  his  true  financial  condi- 
tion. The  examination  offers  an  opportunity  to  the  creditor 
to  obtain  under  oath  all  the  facts  concerning  the  giving  of 
such  a  statement.  It  is  sometimes  the  case  that  a  bankrupt, 
believing  himself  immune  from  prosecution,  is  thrown  off 
his  guard  and  will  admit  facts  in  connection  with  his  condi- 
tion or  in  the  making  of  the  statement  which  could  not 
possibly  be  obtained  otherwise. 

It  is  also  held  that  parties  in  interest  are  entitled  to 
examine  the  testimony  of  the  bankrupt  after  it  has  been 
transcribed  by  the  court  stenographer,  and  likewise  to  pur- 
chase a  copy  of  it  for  use  in  the  state  courts  if  necessary. 
A  copy  of  such  testimony  filed  with  a  grand  jury  as  an 
exhibit  will  in  most  cases  prove  to  be  the  strongest  grounds 
for  the  indictment. 

Settlement  by  Composition 

Another  feature  of  the  Bankruptcy  Act  which  will  be 
of  interest  to  any  credit  man,  and  with  which  he  often  comes 
into  contact,  is  the  matter  of  compositions.  A  composition 
is  practically  an  agreement  between  the  bankrupt  and  his 
creditors  that  the  bankrupt  will  procure  on  the  outside  a 
certain  amount  of  money  or  securities,  and  that,  under  the 
direction  of  the  court,  he  will  divide  such  amount  among 


2l6  INSOLVENCY 

the  creditors  in  proportion  to  their  respective  claims.  The 
bankrupt  through  his  attorney  presents  to  the  court  a 
schedule  containing  the  names  of  all  his  creditors  and  the 
amounts  due  each  of  them,  and  states  the  amount  of  his 
assets  and  the  rate  per  centum  he  is  willing  to  pay  on  such 
debts  as  a  compromise,  provided  that  he  receive  a  discharge 
from  the  balance  of  these  debts. 

After  the  debtor  has  filed  his  schedules  and  has  been 
examined  under  oath,  the  creditors  take  up  the  matter  for 
consideration.  If  they  decide  that  the  bankrupt  has  made 
an  honest  failure  and  has  conducted  himself  properly  in  all 
matters  relating  to  bankruptcy,  and  that  the  per  centum 
offered  is  all  that  the  estaite  could  be  made  to  pay,  then, 
subject  to  the  permission  of  the  court,  they  may  accept  the 
offer  of  composition. 

The  offer  of  composition  must  be  made  by  the  bankrupt 
to  all  his  creditors ;  and  the  referee  sends  ten  days'  notice  of 
such  offer.  If  it  is  impossible  for  all  creditors  to  attend 
the  meeting,  the  bankrupt  may  circulate  his  petition  and 
procure  signatures;  but  any  offer  of  composition  must  be 
accepted  by  the  creditors  in  writing.  The  power  of  attorney 
in  the  proof  of  debt*  confers  such  power  upon  the  lawyer 
who  is  representing  the  claimant. 

It  must  be  noted  that  a  bankrupt  can  offer  terms  of  com- 
position either  before  or  after  adjudication,  but  not  before 
he  has  been  examined  in  open  court  or  at  a  meeting  of  his 
creditors  and  has  filed  in  the  court  the  required  schedules  of 
property  and  list  of  creditors.  The  offer  of  composition 
must  be  accepted  by  a  majority  of  the  creditors  both  in  num- 
ber and  amount  of  claims,  and  such  composition  must  be 
approved  by  the  judge.  The  minority  creditors  have  a 
right  to  file  their  petition  in  protest  against  the  composition 
and  the  judge  will  review  such  petition.     The  property 

*  See  Form  27,  Appendix. 


THE    BANKRUPT 


217 


offered  in  settlement  by  the  bankrupt  will  always  be  dis- 
tributed under  the  direction  of  the  court. 

The  judge  will  confirm  an  offer  of  composition  only  in 
case  the  bankrupt  has  not  failed  to  perform  any  of  the 
duties  incumbent  upon  him  and  has  not  been  gtiilty  of  any 
of  the  acts  which  would  be  a  bar  to  his  discharge.  Prac- 
tically speaking,  anything  that  will  bar  a  discharge  will  be 
a  bar  to  confirming  a  composition.  After  a  creditor  has 
accepted  the  offer  of  the  bankrupt,  he  will  not  be  allowed 
to  withdraw  this  consent  unless  he  can  prove  that  fraud 
exists  or  that  his  signature  has  been  obtained  upon  a  mis- 
representation of  the  facts. 

Procedure  in  Composition  Settlement 

The  bankrupt  must  deposit  with  the  court  sufficient 
money  to  cover  all  costs  in  the  case  and  also  to  pay  any 
claims  that  may  have  priority.  These  claims  are  specified  in 
the  Act.*  While  the  Act  states  specifically  that  money  must 
be  deposited  for  costs  and  debts  having  priority,  as  above, 
it  also  refers  to  the  "securities"  which  the  bankrupt  may  dis- 
tribute among  the  creditors,  and  therefore  the  bankrupt  may 
effect  the  composition  by  paying  to  the  creditors  the  value 
of  the  assets  in  cash  or  securities.  The  reason  for  a  composi- 
tion is  that  the  debtor  can  take  over  the  assets  and  get  more 
out  of  them  than  the  trustee  can.  It  is  simply  the  theory 
that  a  business  is  worth  more  as  a  going  concern  than  as  an 
estate  in  bankruptcy;  and  so  the  bankrupt  calls  on  his 
friends  to  come  to  his  aid  and  furnish  the  money  or  indorse 
his  notes  to  effect  the  composition.  It  is  to  be  admitted 
that  a  composition  is  the  quickest  and  most  inexpensive  way 
in  which  to  settle  an  estate ;  and  creditors  may  often  realize 
more  out  of  it  than  in  winding  up  the  estate  in  the  usual 
way.    A  composition  should,  however,  be  considered  very 

•  864. 


2i8  INSOLVENCY 

carefully ;  the  reasons  for  it  should  be  evident  and  the  bank- 
rupt should  show  beyond  question  how  and  where  he  obtains 
the  funds  with  which  to  pay  his  debts.  The  Act  states  that 
when  the  matter  is  settled  in  this  way  the  bankrupt  shall  be 
discharged  from  all  debts  except  those  agreed  to  be  paid  in 
the  terms  of  the  composition. 

In  opposing  a  composition  it  must  be  shown  that  it  is 
not  for  the  best  interests  of  the  creditors ;  or  that  the  bank- 
rupt has  been  guilty  of  some  act  that  would  be  a  bar  to  his 
discharge;  or  that  the  composition  has  been  procured  by 
fraud.  These  matters  are  so  serious  and  involve  so  many 
points  of  law  that  when  there  is  any  question  about  a  com- 
position it  is  wise  to  lay  all  the  facts  before  a  good  attorney. 
The  attorney  should,  of  course,  be  one  well  versed  in  all 
phases  of  bankruptcy  proceedings. 

If  the  composition  is  accepted,  it  is  supposed  that  the 
precaution  is  taken  to  see  that  the  securities  are  safe  beyond 
question.  It  is  provided,  however,  that  on  breach  of  an 
agreement  by  the  bankrupt  in  a  composition,  the  creditor 
may  bring  action  on  the  original  claim.  If  the  consideration 
consists  of  negotiable  paper  and  the  bankrupt  fails  to  fulfil 
the  obligations  and  agreements  in  connection  therewith,  the 
creditor  may  recover  his  whole  debt  from  the  bankrupt.  It 
is  also  to  be  noted  that  the  confirmation  of  a  composition 
will  regularly  discharge  a  debt  created  by  fraud,  save  as  to 
those,  specifically  excepted  by  the  Act,  and  this  is  taken  to 
mean  that  a  debt  created  by  a  false  statement  will  be  dis- 
charged. There  are  also,  as  intimated,  certain  debts  that 
are  not  discharged  in  composition.  This  brings  up  again 
the  discussion  of  ''provable"  and  "not  provable"  debts — a 
question  too  technical  for  the  layman,  as  was  shown  in  the 
discussion  of  this  subject  when  dealing  with  the  claims 
themselves.  For  this  reason  such  matters  should  be  referred 
to  an  attorney. 


THE    BANKRUPT 


219 


False  Claims  and  Extortion  of  Property  from  Bankrupt 

It  has  been  shown  that  the  concealment  of  assets,  the 
making  of  a  false  oath,  and  other  offenses  on  the  part  of 
the  bankrupt  are  punishable  under  the  statute.  It  must  also 
be  borne  in  mind  that  it  is  an  offense  punishable  under  the 
bankruptcy  statute  to  file  knowingly  and  fraudulently  under 
oath  any  false  claim  against  the  estate  of  a  bankrupt,  or  use 
such  claim  in  any  composition,  either  personally,  or  by  agent, 
proxy,  or  attorney;  and  this  applies  likewise  to  the  party 
acting  in  the  capacity  of  agent,  proxy,  or  attorney.  It  is 
also  a  punishable  offense  knowingly  and  fraudulently  to 
receive  any  material  amount  of  property  from  a  bankrupt 
after  the  filing  of  the  petition,  with  intent  to  defeat  any  of 
the  provisions  of  the  Act.  In  other  words,  any  one  who 
knowingly  receives  property  from  the  bankrupt  belonging  to 
the  estate,  assists  the  bankrupt  in  making  a  concealment  of 
assets ;  and  this  clause  of  the  Act  makes  the  person  so 
receiving  property  guilty  also  of  an  offense. 

One  of  the  most  important  provisions  of  the  Act  is  in 
regard  to  extorting  money  in  bankruptcy  proceedings.  It 
is  a  punishable  offense  to  extort  knowingly  and  fraudulently, 
or  to  attempt  to  extort,  any  money  or  property  from  any 
person  as  a  consideration  either  for  acting  or  forbearing  to 
act  in  bankruptcy  proceedings.  This  is  somewhat  similar 
to  the  state  laws  regarding  the  compounding  of  felonies; 
i.e.,  if  a  person,  for  example,  has  stolen  goods  or  money 
from  another,  and  this  latter  agrees  not  to  prosecute  the 
offender  in  consideration  of  payment  for  the  goods,  then, 
under  certain  conditions  this  constitutes  the  compounding 
of  a  felony,  and  lays  the  party  forbearing  to  prosecute,  him- 
self liable  to  prosecution.  The  taking  of  property  from  the 
party  in  bankruptcy  under  any  such  circumstances  is  a  viola- 
tion of  the  spirit  and  purpose  of  the  Bankruptcy  Act,  as 
attempting  to  prevent  the  administration  of  the  estate  by  the 


220  INSOLVENCY 

proper  court,  and  as  also  attempting  to  obtain  a  preference 
over  other  creditors.  Therefore,  when  a  case  has  been 
developed  against  a  bankrupt  in  the  examination  which 
would  lead  to  a  prosecution  in  the  ordinary  course,  a 
creditor  should  exercise  great  care  in  accepting  any  kind 
of  settlement  from  either  the  bankrupt,  his  family,  or  friends 
without  taking  advice  from  his  legal  counsel. 

As  the  examination  is  conducted  in  the  presence  of  the 
referee  and  he  is  familiar  with  the  circumstances  and  the 
facts  developed,  it  might  be  a  good  idea  to  acquaint  the 
referee  with  any  offer  of  compromise  as  soon  as  it  is  made. 
For  example,  if  a  case  has  been  developed  against  a  debtor 
for  making  a  false  statement,  and  the  attorney  of  the  debtor 
realizes  that  his  client  is  made  liable  to  a  criminal  prosecu- 
tion, it  is  possible,  under  certain  conditions,  for  the  creditor 
to  receive  payment  for  his  account  from  the  family  of  the 
debtor  and  yet  not  be  guilty  of  an  offense  under  the  Act. 
As  stated,  it  might  be  the  safest  plan  to  acquaint  and  keep 
the  referee  advised  of  any  offers  of  settlement  which  may 
come  up,  even  outside  the  bankruptcy  court.  By  doing  so, 
and  following  the  provisions  of  the  Act  in  other  similar 
matters,  the  creditor  will  not  be  guilty  of  knowingly  and 
fraudulently  committing  the  offense  within  the  meaning  of 
the  law.  The  punishment  for  such  offenses  is  imprisonment 
for  a  term  not  exceeding  two  years. 

Another  important  provision  of  the  Act  is  that  the 
bankruptcy  court  will  not  sanction  an  agreement  to  stifle 
prosecution  for  a  crime,  although  it  may  increase  the  assets 
of  the  estate.  In  this  connection  it  may  be  well  to  call  to 
mind  what  was  said  above,  concerning  the  jurisdictions  of 
the  state  and  Federal  courts  in  handling  various  offenses 
growing  out  of  the  examination  of  the  bankrupt. 


CHAPTER    XXIII 

DISCHARGE   IN    BANKRUPTCY 

Discharge  of  Bankrupts 

The  discharge  of  the  bankrupt  is  one  of  the  most  im- 
portant matters  in  which  creditors  are  concerned,  and  al- 
though only  ten  days'  notice  is  requisite  in  other  orders  in 
bankruptcy,  thirty  days'  notice  of  all  hearings  must  be 
given  the  creditors  to  act  on  an  application  for  discharge. 

A  person  who  has  been  adjudged  a  bankrupt  may  file  an 
application  for  a  discharge  from  all  his  provable  debts,  save 
those  which  are  excepted  by  law,  at  any  time  after  the  ex- 
piration of  one  month  and  within  the  next  twelve  months 
subsequent  to  the  adjudication.  Under  certain  conditions 
the  judge  may  permit  the  filing  of  such  an  application  after 
the  expiration  of  the  twelve  months,  but  within  the  next 
following  six  months.  Copies  of  the  petition  are  published 
in  a  newspaper,  and  affidavit  of  such  publication  is  made, 
stating  the  days  on  which  the  notices  appeared.  The  printed 
notices  are  attached  to  the  affidavit,  which  is  then  filed  in  the 
records  of  the  court. 

A  bankrupt  who  has  been  denied  a  discharge  after  an 
investigation  of  the  merits  of  his  petition  by  a  judge,  is  not 
entitled  to  file  a  second  application  for  a  discharge  in  the 
same  proceedings. 

Opposition  to  Discharge 

An  application  for  a  discharge  may  be  opposed  by  any  of 
the  parties  in  interest.  The  construction  placed  upon  this 
expression  is  so  broad  that  it  might  be  said  to  include  almost 
any  creditor.  If  a  creditor  files  specifications  of  objection  to 
a  discharge  and  later  abandons  the  proceeding,  the  court  may 

221 


222  INSOLVENCY 

in  its  discretion  permit  other  creditors  to  carry  on  the  op- 
position as  if  they  had  originally  filed  the  specifications.  It 
has  also  been  held  that  the  failure  of  a  creditor  to  object  to 
a  discharge  does  not  bar  his  bringing  action  for  fraud  after 
the  discharge. 

A  creditor  who  intends  to  oppose  an  application  for  dis- 
charge files  with  the  clerk  of  the  court  a  statement  on  a 
-prescribed  form,  citing  the  case  in  bankruptcy  and  giving 
his  own  name  and  address  fully,  as  required  by  law.  The 
form  used  is  a  simple  one,  to  be  found  in  any  of  the  works 
on  bankruptcy  or  to  be  obtained  from  the  clerk  of  the  court. 
The  specifications  of  objection  may  be  filled  out  on  the 
prescribed  form,  or  merely  the  wording  of  the  form  fol- 
lowed, but  the  specifications  must  always  be  in  writing,  must 
state  the  name  of  the  opposing  creditor,  and  show  that  he  is 
a  party  in  interest.  The  statement  that  he  is  a  creditor 
whose  debt  will  be  released  by  a  discharge,  is  sufficient  to 
show  that  he  is  a  party  in  interest.  The  specifications 
should  then  state  briefly  and  specifically  the  grounds  of 
opposition.  The  object  of  the  specifications  is  to  give  the 
bankrupt  reasonable  notice  of  what  is  expected  to  be  proved 
against  him,  and  to  advise  the  court  of  the  issue  to  be  tried. 
The  facts  in  the  specifications  must  be  set  forth  exactly  and 
fully;  for  instance,  if  the  ground  of  objection  is  the  com- 
mission of  an  offense  or  crime  under  the  Act,  it  is  insufficient 
to  quote  merely  the  words  of  the  statute,  but  the  specifica- 
tions must  show  what  the  offense  is,  as  well  as  the  nature 
and  the  facts  or  figures  in  connection  therewith.  Before 
drawing  up  so  important  a  paper  it  is  well  to  study  the  forms 
in  one  of  the  larger  works  on  bankruptcy  and  follow  the 
one  which  most  closely  fits  the  particular  case.  The  opposi- 
tion to  a  discharge  is  such  an  important  matter  that  it  is 
well  for  the  creditor  to  employ  a  competent  attorney  to 
handle  it. 


DISCHARGE    IN    BANKRUPTCY  223 

The  filing  of  this  statement  is  necessary  to  enter  an 
appearance.  The  creditor  may  enter  his  appearance  in 
person,  or  by  attorney ;  but  the  attorney  must  be  one  who  is 
duly  authorized  to  practice  in  the  Federal  courts.  Unless 
the  appearance  is  properly  entered  or  duly  authorized,  it 
will  be  disregarded.  Also,  the  creditor  failing  to  enter  his 
appearance  has  no  standing"  in  court  as  to  the  petition  for 
discharge,  and  therefore  cannot  be  heard  in  opposition  to  it. 

As  soon  as  the  entry  is  made,  all  proceedings  upon  the 
petition  are  suspended  until  the  specifications  of  grounds  in 
opposition  to  the  discharge  are  filed.  An  appearance  is 
usually  entered  after  the  petition  of  the  bankrupt  for  dis- 
charge has  been  filed ;  but  the  appearance  may  be  entered  to 
oppose  the  discharge  at  any  time  before  the  expiration  of  the 
time  limited  by  the  order  of  the  court. 

Sometimes  the  creditors  may  signify  their  intention  to 
oppose  the  discharge  early  in  the  course  of  the  proceedings ; 
but  it  is  usually  a  better  plan  to  wait  until  the  bankrupt  files 
his  petition  for  discharge,  and  then  immediately  enter  an 
appearance  and  proceed  to  file  the  specifications. 

Acts  Barring  Discharge 

The  court  will  refuse  the  application  for  a  discharge  if 
the  bankrupt  has : 

"i.  Committed  an  offense  punishable  by  imprisonment 
as  herein  provided  ;*  or, 

"2.  With  intent  to  conceal  his  financial  condition,  de- 
stroyed, concealed,  or  failed  to  keep  books  of  account  or 
records  from  which  such  condition  might  be  ascertained ;  or, 

"3.  Obtained  money  or  property  on  credit  upon  a 
materially  false  statement  in  writing,  made  by  him  to  any 
person  or  his  representative  for  the  purpose  of  obtaining 
credit  from  such  person;  or. 


In   §29,  Bankruptcy  Act. 


224 


INSOLVENCY 


"4.  At  any  time  subsequent  to  the  first  day  of  the  four 
months  immediately  preceding  the  fiHng  of  the  petition 
transferred,  removed,  destroyed,  or  concealed,  or  permitted 
to  be  removed,  destroyed,  or  concealed  any  of  his  property, 
with  intent  to  hinder,  delay,  or  defraud  his  creditors ;  or, 

"5.  In  voluntary  proceedings  been  granted  a  discharge 
in  bankruptcy  within  six  years ;  or, 

"6.  In  the  course  of  the  proceedings  in  bankruptcy  re- 
fused to  obey  any  lawful  order  of,  or  to  answer  any  material 
question  approved  by  the  court : 

"Provided,  that  a  trustee  shall  not  interpose  objections  to 
a  bankrupt's  discharge  until  he  shall  be  authorized  so  to  do 
at  a  meeting  of  creditors  called  for  that  purpose."* 

It  is  not  necessary  that  the  bankrupt  shall  have  been  con- 
victed of  any  offense  to  bar  him  from  discharge;  but  his 
discharge  lies  within  the  discretion  of  the  court. 

A  discharge  will  be  refused  where  the  bankrupt  pur- 
chases the  claim  of  a  creditor  in  order  to  secure  a  withdrawal 
of  his  objections  to  the  bankrupt's  petition  for  discharge. 
But  as  already  intimated,  it  does  not  necessarily  subject  the 
bankrupt  to  the  penalty  of  this  provision — nor  is  it  wrongful 
— ^to  buy  off  a  creditor  where  the  money  is  not  received 
directly  from  the  bankrupt. 

Concealment  of  Financial  Condition 

The  phrase  "to  conceal"  used  in  No.  2  of  the  offenses 
which  bar  a  discharge,  includes  the  secreting  of  property 
and  the  falsification  or  mutilation  of  papers  or  books  of 
account.  There  are  so  many  legal  points  which  may  arise 
in  the  discussion  of  concealment  that  it  is  well  for  the 
credit  man  to  go  into  the  subject  at  length  in  one  of  the 
larger  works  on  bankruptcy.  The  decisions  are  numerous 
and  broad ;  but  it  may  be  stated  in  brief  that  the  bankrupt 


*  §  14,  Bankruptcy  Act. 


DISCHARGE    IN    BANKRUPTCY 


225 


is  supposed  to  keep  books  in  proportion  to  the  size  and 
nature  of  his  business,  and  that  such  books  must  be  in- 
telHgently  kept  so  as  to  show  his  true  condition.  If  not  so 
kept  as  to  be  intelHgible  to  one  versed  in  bookkeeping,  they 
may  be  said  to  come  within  the  meaning  of  that  part  of 
the  statute  which  deals  with  the  concealment  of  the  bank- 
rupt's financial  condition.  In  order  to  prevent  his  discharge 
it  must  be  shown  that  the  bankrupt  has  destroyed,  concealed, 
or  failed  to  keep  proper  books,  with  the  intent  to  conceal 
his  financial  condition.  The  following  illustration  may  be 
cited  :* 

"A  failure  of  a  bankrupt  to  enter  on  his  books,  loans 
from  relatives  and  friends  was  found  to  be  with  intention 
to  conceal  his  financial  condition  and  was  a  bar  to  his  dis- 
charge, notwithstanding  the  bankrupt's  explanation  that  he 
did  not  set  down  the  notes  as  he  thought  these  creditors 
would  not  push  him." 

Where  the  bankrupt  acts  honestly  without  intent  to  con- 
ceal his  financial  condition,  he  may  be  entitled  to  a  discharge, 
although  he  may  have  destroyed  or  neglected  to  keep  books 
through  inadvertence,  ignorance,  or  mistake.  Under  the 
Statute  of  1867  this  was  not  so,  as  the  mere  failure  of  a 
merchant  or  tradesman  to  keep  books  of  account,  without 
regard  to  intent,  was  all  that  was  necessary  to  defeat  his 
discharge. 

False  Statement  as  a  Bar  to  Discharge 

In  the  amendment  of  February  5,  1903,  it  was  provided 
that  a  bankrupt  should  not  be  discharged  if  he  had  obtained 
credit  on  a  materially  false  statement  in  writing,  made  to  a 
person  for  the  purpose  of  obtaining  credit.  Nothing  like 
this  was  contained  in  any  of  the  former  laws  of  bankruptcy 
in  this  country.    To  prevent  a  discharge  under  this  amend- 


*In  re  Alvord,  135  Fed.  Rep.  236. 


226  INSOLVENCY 

ment,  it  must  be  shown,  first,  that  the  bankrupt  obtained 
property  on  credit,  and,  second,  that  he  made  to  the  person 
from  whom  he  obtained  the  said  property  a  materially  false 
statement  in  writing  for  the  purpose  of  obtaining  it  on 
credit.  The  statement  referred  to  must  have  been  made  by 
the  bankrupt,  or  by  his  agent  with  his  authority,  and  to  the 
creditor  who  granted  the  credit.  In  further  construction  of 
this  provision,  it  has  been  held  sufficient  to  bar  the  discharge 
if  such  statement  was  made  to  a  commercial  agency ;  and  the 
statement  need  not  have  been  made  to  the  creditor  opposing 
the  discharge. 

It  has  also  been  held  sufficient  to  bar  a  discharge  if  the 
false  statement  was  made  to  a  creditor  whose  debt  was  paid 
in  full  before  bankruptcy.  A  false  statement  by  one  partner 
will  defeat  the  discharge  of  another  partner,  provided  the 
firm  received  credit  on  such  statement;  but  a  false  state- 
ment in  writing  by  one  partner  will  not  bar  a  personal 
discharge  of  another  partner. 

The  statement  upon  which  credit  was  secured  must  have 
been  made  in  writing,  as  an  oral  statement  is  not  sufficient ; 
but  there  is  nothing  in  the  Act  which  requires  it  to  be  signed 
by  the  debtor.  The  statement  must  also  be  materially  false 
in  fact,  and  must  be  wilfully  and  intentionally  misleading. 
If  it  is  false  and  the  credit  man  has  granted  the  credit  on 
the  strength  of  such  statement,  it  is  sufficient  to  bar  the 
discharge.  If,  however,  it  is  shown  that  the  credit  man  did 
not  grant  credit  on  the  faith  of  such  statement,  or  if  the 
debtor  did  not  make  the  statement  for  the  purpose  of  obtain- 
ing credit,  it  will  not  bar  the  discharge,  no  matter  how 
false  the  statement  may  have  been. 

Fraudulent  Conveyance  of  Property 

It  was  also  provided  in  the  amendment  of  1903  that  a 
discharge  will  not  be  granted  when  the  bankrupt  has,  at 


DISCHARGE    IN    BANKRUPTCY 


227 


any  time  subsequent  to  the  first  day  of  the  four  months 
immediately  preceding  the  filing  of  the  petition,  transferred, 
destroyed,  or  concealed  any  of  his  property  with  intent  to 
hinder,  delay,  or  defraud  his  creditors.  This  provision 
covers  fraudulent  conveyances,  and  is  very  sweeping,  but 
there  are  some  exceptions  to  its  general  provisions.  For 
instance,  an  assignment  for  the  benefit  of  creditors  is  not 
in  itself  fraudulent  and  will  not  be  a  bar  to  a  discharge,  for 
the  laws  of  some  of  the  states  sanction  the  making  of  assign- 
ments and  the  preferring  of  one  or  more  creditors ;  and  in 
such  states  a  preference  is  not  made  a  bar  to  a  discharge. 
The  property  transferred  or  concealed,  to  fall  within  this 
provision,  must,  of  course,  belong  to  the  bankrupt.  It  must 
also  be  shown  that  the  purpose  of  the  transfer  was  to  defraud 
the  entire  body  of  creditors. 

Refusal  to  Obey  Court 

The  bankrupt  will  be  refused  a  discharge  if,  during  the 
proceedings  in  bankruptcy,  he  has  refused  to  obey  any  law- 
ful order  of,  or  to  answer  any  material  question  approved 
by,  the  court.  If  the  bankrupt  is  merely  guilty  of  contempt 
in  refusing  to  obey  an  order  of  the  court,  he  is  not  entitled 
to  a  discharge ;  and  it  is  not  necessary  that  he  be  convicted 
of  such  charge.  It  is  not  even  necessary  that  the  bankrupt 
actually  refuse  to  obey  the  order  or  declare  that  he  will  not 
do  so ;  a  delay  or  failure  on  his  part  to  perform  for  a  reason- 
able time  after  an  order  is  made,  is  a  refusal  sufficient  to 
prevent  a  discharge. 

The  bankrupt  will  not  be  granted  a  discharge  when,  in 
voluntary  proceedings,  he  has  been  granted  a  discharge 
within  six  years. 

The  Act  and  the  Credit  Man 

It  will  be  noted  that  although  considerable  space  has 


228  INSOLVENCY 

been  given  to  the  National  Bankruptcy  Act  in  the  present 
volume,  no  point  has  been  covered  thoroughly.  The  last 
item  discussed,  that  is,  discharge  in  bankruptcy,  covers  many 
pages  in  the  larger  works  on  the  subject  of  bankruptcy;  but 
in  the  present  volume  the  writer  has  dealt  with  only  such 
parts  of  the  Act  as  may  be  readily  understood  and  handled 
by  the  credit  man. 

Bankruptcy  jurisprudence  represents  features  which 
should  appeal  to  the  credit  man  beyond  all  other  branches 
of  the  law,  for  it  not  only  concerns  him  directly,  but  the 
bankruptcy  court  is  practically  the  only  court  where  he  has 
a  standing  and  can  be  heard  on  almost  the  same  footing  as  a 
licensed  attorney.  Because  of  its  importance  to  him,  the 
credit  man  should  not  only  study  the  Act,  but  he  should  go 
further  into  the  subject  and  procure  one  or  more  of  the  very 
excellent  works  treating  of  bankruptcy.  The  study  of 
such  books  will  give  him  a  thorough  knowledge  of  the  sub- 
ject that  will  be  of  continuing  value  in  his  general  work 
and  that  will  be  of  even  greater  service  when  he  appears 
among  the  creditors  in  a  court  of  bankruptcy.    . 


APPENDIX 


I.     FORMS 
2.     THE    NATIONAL    BANKRUPTCY    ACT 


FORMS 


231 


191 

M.  C.  KISER  COMPANY, 

ATLANTA,  GEORGIA 

Gentlemen: 

Enclosed  please  find  order  for 

Been  buying  Shoes  from 

Been  buying  Dry  Goods  and  Notions  from 

Been  buying  Clothing  from 

Been  buying  Groceries  from 

Other  references : 

Banks  with 

I  judge  has  about  $ stock  on  hand,  which 

is  insured  for  $ Does  about  $ 

annual  business,  divided  $ Cash,  $ 

on  Credit. 

Remarks : 


N.  B. — One  of  these  reports  MUST  accompany 
each  order,  whether  for  old  or  new  customers,  and  give 
three  or  more  references  in  each  line  if  possible. 


Form  1.  Salesman's  Report.  This  report  is  sent  in  by  the  sales- 
man with  every  order.  It  brings  the  changes  in  the  condition  of  the 
merchant's  business  almost  automatically  to  the  attention  of  the  credit 
office. 


232  APPENDIX 


J 


SPENCER   TURNER   CO. 

86   WORTH    STREET 
New  York  City 


SALESMAN'S  NEW  CUSTOMER  REPORT 

To  be  filled  out  and  sent  in  with  each  new  customer's  order. 
Do  this  in  order  to  insure  receiving  credit  for  the  sale. 

Report  from 

Date 19. 

Amount  of  order,  about  $ 

Sold  to 

Address  i 

City  or  Town 

State 


1.  Kind  of  business 

2.  Value  of  stock,  $ 

3.  Condition,  and  if  well  kept 

4.  Insurance,  $ 

5.  Is  business  growing? 

6.  What  is  local  standing? 

7.  Has  he  good  ability? 

8.  Is  location  good  ? 

9.  What  is  competition? 

10.  Banks  with 

11.  What  is  your  opinion  of  customer? 

Signed Salesman 

Remarks 


Form  2.  Salesman's  New  Customer  Report.  This  report  is  used  by 
some  mercantile  houses.  It  is  sent  in  by  the  salesman  with  every  order 
from  a  new  customer,  and  often  determines  the  next  step  in  investigat- 
ing the  customer's  standing. 


FORMS 


233 


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Form  3.  Trade  Inquiry  Blank.  This  is  the  old  form  used  by 
N.  A.  C.  M.  members,  and  for  size  and  style  is  preferred  by  some  credit 
men  to  Form  4.  The  house  receiving  it  can  see  at  a  glance  what  line 
of  business  is  inquiring.  If  one  dry-goods  house  inquires  of  another 
dry-goods  house,  the  inquiry  is  much  more  important  to  both  houses 
than  if  the  lines  of  business  differ.  The  form  is  sent  out  in  duplicate, 
the  recipient  keeping  one  copy  for  his  own  files  and  returning  the 
other  to  the  inquirer. 


234 


APPENDIX 


RETURN  THIS  TO  US 


632  ST.  CLAIR  AVE..  N.  W.. 

Cleveland,  Ohio, 


.191 


Messrs- 


Kindly  give  us  below  YOUR  EXPERIENCE  with 
Name 


P.  O, 


AU.  INFORMATION  WILL  BE  CONSIDERED  STRICTLY  CONFIDENTIAL 


Yours  truly. 


JOSEPH  &  FEiSS  CO. 

MEMBERS  NATIONAL  ASSOCIATION  OF  CREDIT   MEN 


Sold  Since- 


Terms- 


Highest  Recent  Credit  $._ 

fOn  Open  A 
On  Notes, 


Past  Due 


On  Open  Aco 
On  Notes, 

First  Order,  $ 

Other  Informatioa ^ 


MANNER  OF  PAYMENT 


Discounts 

Prompt  and  satisfactory 

Slow  but  considered  good 

Slow  and  unsatisfactory 

Pays  C.  O.  D. 

Sell  for  cash  only 

Account  secured 

Notes  secured 

Account  closed  for  cause 

Makes  unjust  claims 

Collected  by  attorney 


(Original) 

Form  4.  Trade  Inquiry  Blank.  This  is  the  standard  inquiry  blank 
poses  it  covers  all  points  thoroughly.  The  only  criticism  is  the  small 
blank  is  sometimes  used.  If  all  questions  on  the  blank  are  carefully 
This  blank  is  satisfactory  and  should  serve  as  a  general  model  for 
ought  to  be  used  in  making  inquiries,  unless  it  should  fail  to  conform 
form  is  made  out  in  duplicate,  one  to  be  returned  to  the  inquirer  and 


FORMS 


235 


RETAIN  THIS  FOR  YOUR  FILES 


632  ST.  CLAIR  AVE.,  N.  W., 

Cleveland.  Ohio, 


.191 


Messrs..™ 


We  give  you  below  OUR  EXPERIENCE  with 


Name. 
P.  O.- 


PLCASB   CONSIDER    INrORMATION    STRICTUV   CONFIDENTIAL 


Yours  truly, 


JOSEPH  &  FEISS  CO. 

MEMBERS   NATIONAL  ASSOCIATION  OF  CREDIT   MEN 


Sold  Since. 
Terms 


Highest  Recent  Credit  $. 

( On  Open  A 
Owing  Now-j 

( On  Notes, 


Past  Due 


On  Open  Aco 
(  On  Notes, 

First  Order,  $„ _ 

Other  Information 


MANNER  OF  PAYMENT 


Discount! 

Prompt  and  satisfactory 

Slow  but  considered  food 

Slow  and  unsatisfactory 

Pays  C.  O.  D. 

Sell  for  cash  only 

Account  secured 

Notes  secured 

Account  closed  for  cause 

Makes  unjust  claims 

Collected  by  attorney 


(Duplicate) 

adopted  by  the  National  Association  of  Credit  Men.  For  practical  pur- 
space  allowed  for  "other  information,"  but  the  reverse  side  of  the 
and  correctly  answered,  the  subject  of  the  inquiry  will  be  fully  covered, 
such  blanks.  If  the  house  is  a  member  of  the  Association,  this  blank 
with  the  other  blanks  adopted  for  use  in  the  credit  department.  The 
the  other  to  be  kept  on  file. 


236 


APPENDIX 


Foni>9.    lOM.    12-13 


FRANK  M  HAYNES,  Pre^        FJ^ANK  PRESTON.  V-Pre^        O.  M.  TATE,  Secy  and  Tteu.       J.  B.  CRISWELL,  Sale.  Mgr. 

HAYNES-HENSON  SHOE  COMPANY 

Wholesale  Shoes  and  Rubbers 


Knozville,  Tenn., 


DEAR  SIR: 

We  wish  to  ask  your  confidential  opinion  and  advice  as  to.  the 

safety  of  extending  credit  to  the  extent  of  $ ......to 

Messrs,.- , 

We  will  gladly  return  this  courtesy  at  any  time.  Thanking  you 
in  advance  for  prompt  reply.      Yours  truly. 


NES-HENSON   SHOE   CO. 

We  subscribe  to  hjVi  VedYMenV Assoeiatio'tt                             ^^ 

MERCHANT'S   REPORT 

ATTORN EYS  REPORT 

BANKS  REPORT 

How  long  told? 

Eirtimated. 

Value  of  Mdse.  $...   

••      ••  Real  EalateJ... ... 

"      "  Other  Asseti  | 

Banlcwith 

Deposits  how  often? 

Highest  credit  $ 

Owing  nowl „ 

Do  you  have  drafts  for  collection? 

Are  they  paid  usually? 

Eatimate  of  Debt.  $ 

Do  you  know  of  clainu  in  Attorney', 
hand,  recently? 

Could  you  collect  the   above   account 
by  .uit> 

Do  you  know  of  any  debt.  pa.t  due  or 

in  Attorney's  hands?.  . 

How  Jong  put  due> 

he  prompt  or  ilow) „ 

Value  of  Mdse..  eOimated  $ 

Real  Estate,  estimated  $ 

Encumbrance  on  Real  Estate  $ 

Would  you  lend  above  amount  with- 
out  security)... 

Give  general  information  below. 

Ha.  either  MEMBER  OF  THE  FIRM  ever  awigned.  burned  out.  or   gone  through  bankruptcy. 


1  recommend  the  rUk  from  ■  moral  rtandpoint? — 

I  give  the  name*  of  other  Wholeuler.  with  whom  he  i.  dealing?^. 
REMARKS 


Form  5.  Trade  Inquiry  Blank.  This  is  a  convenient  form  of 
inquiry  and  might  be  styled  the  "triple-expansion"  type.  It  is  used 
by  many  leading  houses  in  jobbing  lines.  The  inquiry  is  made  up  in 
triplicate  on  the  typewriter,  using  carbon  paper,  and  the  name  of  the 
merchant,  attorney,  or  bank  to  whom  it  is  sent  is  afterwards  filled  in 
at  the  top.  The  cost  of  printing  is  thus  greatly  reduced;  the  size  is 
standardized  for  filing;  the  questions  are  few  and  strictly  to  the 
point.^  The  only  criticism  is  that  there  is  no  space  for  recording  the 
experience  of  the  inquirer,  but  on  first  orders  this  is  usually  noted 
on  the  blank  with  the  amount  of  the  order. 


FORMS 


^Z7 


ANPERSON-DULIN-VARNELL  CO. 
Wholesale  Dry  Goods,  Notions 

MILLINERY  and  FURNISHINGS 

DEAR  SIR : 

We  havp  an  caAn  fmm  . , ., 

Amount  $ : Will  you  kindly  give  us  your  experience  below,  and  greatly  oblige.      We  will  gladly 

return  the  courtesy  when  an  opportunity  is  presented.              Respectfully, 

OUR  EXI 

Highest  Credit  $ 

Amount  Owing  $       .                                      ., 

»ERIENCE 

Antiripates 
Di.woimts 

When  n„e 

Days  .Slnw. 

Am't  Past  Due 

NAME                                                                                                            ANDF  R  SON-f)!  II  IN-VARNF  LL  CO 

KNOXVILLE,  TENN. 

.<^W                                             In                                        lOl 
HigKMt  Credit  .$ 

Antiripates 

When  n,.e 

When  Due 

Amount  Past  Diie 

Hay,  .SInvf 

C^minlermands  Orders 

Makes  IJnjiistClaims 

Remark, 

' 

'• 

Ry 

Form  6.  Trade  Inquiry  Blank.  The  inquirer  fills  in  the  upper 
half  of  the  blank,  which  is  perforated  through  the  middle.  The 
recipient  fills  in  the  lower  half,  detaches  this  part  and  returns  it  to 
the  inquirer,  keeping  the  upper  half  for  his  own  files. 


238 


APPENDIX 


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239 


OOFTDON    P.  KISCR, 


KISER.Tpcasuheb.  C.J.SULJ.IVAN,SjCC>.tTAB 


P.O.  BOX  1747 


a^_ 


BOSTON  OFFICE: 

57    l_l  NCOl_N   ST. 


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Form  8.  Trade  Inquiry  Blank.  This  inquiry  blank  leaves  it  to  the 
discretion  of  the  recipient  to  give  whatever  information  he  desires. 
Many  houses  have  a  rubber  stamp  outlining  their  ledger  experience  and 
leaving  spaces  to  be  filled  in  by  the  bookkeeper.  Such  information 
stamped  on  this  sheet,  with  a  few  words  of  opinion  from  the  credit 
man,  gives  all  that  is  desired.  The  practice  of  giving  ledger  experience 
is  so  general  that  it  is  not  necessary  to  specifically  request  it. 


240  APPENDIX 


CONFIDENTIAL  INFORMATION 

CREDIT  DEPARTMENT 


Geo.  D.  Witt  Shoe  Company. 

Manufacturers 


LYNCHBURG.  VA. - - ~ 19. 


M 


DEAR  SIR: 

We  will  Esteem  it  a  favor  If  you  will  kindly  give  ua  la  strict  confidence  your  opinion  of  the 
Party  named  below  as  a  moral  and  financial  risk,  IHentloning  any  claim  against  him  that   has   come  to 
Your  knowledge  and  any  other  matter  which  in  your  judgment  will  aid  In  determining  his  desirability  as  A 
customer  we  will  highly  ESTEEM  YOUR  KINDNESS  AND  WILL  BE  GLAD  TO  RECIPROCATE  AT  ANY  TIME. 
YOURS  VERY  TRULY, 

GEO.   D.  WITT  SHOE  CO* 


AMOUNT  OF  ORDBRS- 


YOURS  TRULY. 


Form  9.  Trade  Inquiry  Blank.  This  is  another  form  of  inquiry 
blank  used  by  large  houses.  It  leaves  largely  to  the  house  ans\yering 
the  inquiry  how  much  information  it  should  volunteer  in  addition  to 
the  ledger  experience,  which  is  always  expected. 


FORMS  241 


NATIONAI.ASIIOCIATIONOPCRK- 


(Erg^tt  WtpnrUmnt  Capital  paid  in,  »i,6Sp,opo.oo 


Dear  Sin 

In  Strict  confidence,  please  give  us  any  information 
you  may  possess  concerning  the  financial  ability,  character,  busi- 
nesB  capacity,  and  paying  qualities  of  firm  named  below. 

Holding  ourselves  ever  in  readiness  to  reciprocate  your  cour- 
tesy. 

Yours  very  truly. 


[OarOnbrt- 


INQUIRY  ON 


How  long  sold? 

Highest  credit?. 


Terms  Regular  or 
aerms,  special? _ 


Piscount 


Prompt,  Slow  or 
Very  Slow? 


Now  Owes  $. 
Past  Due  $  . 
Due  Since 


Form  10.  General  Inquiry  Blank.  An  excellent  form  of  credit 
inquiry  blank  for  obtaining  general  information.  It  can  be  used  in 
the  typewriter  with  carbon  paper;  the  questions  are  short  and  there 
is  ample  space  for  "General  Remarks." 


242 


APPENDIX 


(Btmt  if partfflgnt  Capital  Paid  In,  si.eao.oocoo 


&l|og  IMattufarturgrg 


HtjnrliburQ.  l^a.. 


Dear  Sir: 

In  Strict  confidence,  please  give  us  any  inforoation 
you  may  possess  concerning  the  financial  ability,  character,  buai- 
ness  capacity  and  paying  (jualltlea  of  firm  named  below. 

Thimking  you  in  advance  for  your  prompt  and  kind 
reply  we  are. 


Yours  very  truly. 


INQUIRY  ON 


Seem  prosperous? 
Keep  fair  balanoe?^ 
Pay  notes  when  due?- 


GENERAL  REMARKS 


Honor  Drafts  on  presentation? 

Estimated  net  worth  over  all  lia- 
bilities i , 

Would  you  eonsider  reasonably 
safe  credit  risk  for  f 


Form  11.  Inquiry  Blank  for  Bank.  This  blank  is  for  the  bank's 
report  on  its  customer.  Note  especially  the  questions,  which  are  of 
such  nature  that  they  can  be  easily  answered  by  any  bank  cashier. 
The  answers  will  contain  information  of  value  in  passing  on  the  risk. 
This  is  one  of  the  best  forms  of  bank  inquiry  that  has  been  devised. 


FORMS 


243 


€a)iital  Paid  3n,  ^1.620.000.00 


Atty. 


Dear  Sir: 

In  Strict  Confidence;  please  give  us  any  information 
you  may  possess  concerning  the  financial  ability,  character,  busi- 
ness capacity  and  paying  qualities  of  firm  named  below. 

Thanking  you  in  advance  for  your  prompt  and  kind 
reply  we  are. 

Yours  very  truly. 


INQUIRY  ON 


Seem  prosperous? 


Ever  been  sued  or  had  claim  in  At- 
torney's hands  P___ ,__ 

:0wn3  Real.  Estate?  Value  $ 

Estimated  net  worth  over  all  lia- 
bilities $_J . 


Good  business  ability  and  well 
thought  of  in  cDmmunity?__ 

Would  you  consider  reasonably 
safe  credit  risk  for  $ 


Form  12.  Attorney's  Report.  A  good  form  for  the  attorney's 
report.  The  questions  are  few  and  simple,  leaving  ample  space  for 
"General  Remarks."  This  blank  carries  out  the  idea  that  the  answerer's 
time  is  valuable ;  it  does  not  antagonize  by  a  mass  of  useless  questions. 
The  style  of  inquiry  and  tone  of  the  letter  should  invariably  bring  an 
answer  of  value  to  the  credit  man. 


244 


APPENDIX 


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FOUMS  245 

N.  A.  C.  M.    PROPERTY   STATEMENTS 

Forms  14  to  17,  following,  show  four  typical  property 
statement  blanks,  each  differing  in  some  detail. 

The  property  statement  blanks  of  the  National  Associa- 
tion of  Credit  Men  represent  the  best  thought  of  the  As- 
sociation office  as  well  as  of  the  leading  credit  men  of  the 
country.  They  are  almost  as  complete  as  it  is  possible  to 
make  them.  They  are  the  only  forms  of  statement  blanks 
that  should  be  used  for  large  credits  or  in  dealing  with 
large  houses  which  keep  complete  sets  of  books.  It  is 
possible  that  the  little  country  merchant  cannot  or  will  not 
fill  out  answers  to  all  the  questions,  because  he  does  not 
keep  adequate  books.  It  is,  in  fact,  one  of  the  worst  fea- 
tures with  which  credit  men  have  to  contend  that  the  small 
merchant  knows  but  little  about  his  own  exact  financial 
condition.  But  the  National  Association  has  made  a  vigor- 
ous fight  since  its  inception  for  the  "education"  of  the  small 
merchant,  and  if  he  were  forced  to  make  statements  at 
regular  intervals  it  would  mean  the  saving  of  countless 
dollars  from  credit  losses,  besides  adding  materially  to  the 
value  of  the  mercantile  business  generally  throughout  the 
country. 

The  first  two  pages  of  Form  14  are  reproduced  from  the 
Association  Form  A,  while  the  third  page  is  taken  from 
page  3  of  Association  Form  B.  Both  of  these  forms  are 
for  individual  or  partnership  property  statements,  and  differ 
only  in  the  introductory  paragraph  on  page  2  and  in  the 
arrangement  of  questions  on  page  3.  They  are,  however, 
substantially  the  same  and  serve  the  same  purpose.  Note 
the  argument  on  the  "Reciprocal  Value  of  a  Signed  State- 
ment" on  the  first  page.  In  this  respect  the  blank  is  similar 
to  Form  21. 

Form  15  shows  pages  2  and  3  of  Association  Form  C. 


246  APPENDIX 

This  is  a  corporation  property  statement,  and  the  questions 
differ  correspondingly  from  those  of  the  individual  or  part- 
nership statement.  The  prefatory  page  of  this  blank  is  the 
same  as  that  of  Form  14. 

Form  16  shows  another  Association  property  statement 
blank  for  individual  or  partnership  credits.  The  questions 
are  about  the  same  as  those  of  Form  14,  although  some 
credit  men  prefer  the  arrangement  of  Form  16.  It  is  of 
letter  size,  convenient  for  filing. 

Form  17  is  designed  as  a  "self-contained"  property 
statement.  It  has  flaps  like  an  envelope,  and  is  so  arranged 
that  the  address  is  v^ritten  on  the  back  of  the  statement 
when  it  is  folded  and  sealed  for  mailing.  Thus  the  post- 
mark appears  on  the  statement  blank,  thereby  obviating  the 
necessity  of  saving  an  envelope.  It  is  similar  in  principle 
to  the  self-contained  order  blank  used  by  many  houses.  The 
form  of  this  statement  is  good  and  the  fact  that  it  is  post- 
marked and  addressed,  and  contains  the  signature  of  the 
maker,  will  serve  as  competent  evidence  in  a  case  of  prose- 
cution for  illegal  use  of  the  mails  in  making  a  fraudulent 
statement. 


FORMS  247 

PROPERTY    STATEMENT    BLANK. 


RECOMMENDED  AND  INDORSED   BY  THE 
NATIONAL  ASSOCIATION  OF  CREDIT  MEN 

THE  RECIPROCAL  VALUE  OF  A  SIGNED  STATEMENT 
•*  Good  credit  in  the  markets  of  the  world  enables  every  merchant  to 
add  to  his  ability  to  do  business.     It  gives  him  the  use  of  enlarged  capital, 
thus  enabling  him  to  carry  a  more  complete  stock,  increase  his  sales,  and 
magnify  his  profits. 

Large  assets  are  not  always  necessary  to  the  creation  of  credit;  what 
IS  most  desirable  is,  that  credit  be  iij  relative  proportion  to  the  actual  assets, 
and  in  harmony  with  conditions  which  create  and  maintain  it.  A  mer- 
chant's capital  is  the  sum  of  his  net  available  resources,  plus  his  credit  The 
giver  of  credit  is  a  contributor  of  capital,  and  becomes,  in  a  certain  sense, 
a  partner  of  the  debtor,  and,  as  such,  has  a  perfect  right  to  complete  infer-; 
mation  of  the  debtor's  condition  at  all  times. 

Credit  is  given  a  merchant  because  of  the  confidence  reposed  in  him 
Requesting  a  statement  when  credit  is  asked  is  not  a  reflection  on  one's 
character,  honesty,  or  business  ability,  but  is  done  to  secure  information  to 
enable  business  to  be  conducted  intelligently. 

When  a  statement  is  made  it  should  be  absolutely  correct.  To  make 
It  so  necessitates  the  taking  of  at  least  an  annual  inventory  and  the  keeping 
of  an  accurate  set  of  books.  Statement  giving,  therefore,  will  tend  to 
make  a  debtor  a  better  buyer,  because  more  familiar  with  his  stock,  more 
careful  in  giving  credit,  more  conservative  in  incurring  debt,  and  will  result 
in  a  better  knowledge  of  his  business  generally. 

A  merchant  who  desires  to  serve  his  own  best  interests  should  recog» 
nize  that  his  most  valuable  possession,  apart  from  his  actual  assets,  is  a 
Siound.  substantial  and  unquestioned  reputation  as  a  credit  risk,  and  that, 
under  the  prevailing  conditions  and  demands  of  business,  the  most  effective, 
and  eminently  the  best  way* to  prove  his  basis  for  credit,  is  to  be  willing;  to 
submit  a  statement- of  his  financial  condition. 

NOTE:  The  above  estimate  of  the  value  o£-«.  statement  to  both  giver  and  receiver  is  the 
embodiment  of  the  thoughts  and  experiences  of  scores  of  the  leading  credit  men  of  the  United 
States,  who  are  members  of  the  National  Association  of  Credit  Men,  and  who  thus  desire 
publicity  given  to  their  views  in  order  that  there  may  be  Uie  largest  benefits  to  both  retailer 
and  wholesaler. 

Form  14a.  Property  Statement — Individual  or  Partnership  (prefa- 
tory page). 


248 


APPENDIX 


For  the  purpose  of  obtaining  credit  for  goods  to  be  sold  me  or  as  by  you,  or  for  any 
extension  granted  me  or  ns  on  my  or  our  account  with  you,  the  following  is  given  you  as  a 
true  statement  of  my  or  our  assets  and'liabilities  and  general  financial  condition.  I  or  we 
ag^ee  to  and  wiH  notify  you  immediately  in  writing  of  any  materiallj-  unfavorable  changa 
in  my  or  our  financial  condition,  and  in  the  absence  of  such  notice,  or  of  a  new  and  fuJl 
written  statement,  this  may  be  considered  as  -.  continuing  statement,  and  substantially 
correct 


Firm  name. Date 

Town County. State. 


191. 


ACTIVE   BUSINESS   ASSETS 

Value  of  merdiandise  on  hand  at  cost 

Notes  and  accounts,  cash  value 

Cash  in  hand ...^^ ~. — 

Fixtures,  machinery,  horses  and  wagons 

Total  Active  Business  Assets 


Dollars 

Ceuta  |j 















1 

L 

^ 

eaSlNESS  LIABILITIES 

Owe  for  mdse..  open  acct 

of  which  $ — Is  past  due 

Owe  on  notes  for  mdse. 

Owe  bank ^^ 

Owe  others  for  bor'd  money 

Owe  taxes  and  rent~.l 

Mtges.on  fixtures,  machin'y, 
horses  and  wagons 


Total  Business  Liabilities ....... 


I    M    M    I    I 


Net  Worth  in  Business. 


OUTSIDE  ASSETS 
Total  real  estate,  assessed  valuation,  $.. 
Total  encumbrances... .~. ^....^^ $... 


Personal  property- 
Other  assets 


Equity. 


II    I    I    M   M 


Grand  Total  net  worth  in  and  out  of  Business 

Please  state  location  and  description  of  each  parcel  of  real  estate,  and  cash  valuation 
of,  and  encumbrances  on  each,  and  in  whose  name  each  parcel  is  held. .- 


Form  A. 

Form  14b.     Property  Statement — Individual  or  Partnership   (page  2). 


FORMS 

What  portion  of  real  estate  described  is  homestead?.. 
Have  you  any  other  debts  than  herein  mentioned? 


249 


Full  given  and  surname  of  each  partner 

Age? 

Married? 

Possible  liability  of  each 

member  of  firm  as 
indorser,  bondsman,  etc 

- — • - 







What  kind  of  business  do  you  conduct  ? ^ 

Insurance  on  stock. '. On  fixtures,  machinery,  horses  and  wagons 

On  real  estate -> 

•  Amount  of  sales  last  year Amount  of  expenses 

last  year What  proportion  of  your  sales  is  on  credit? 

How  often  do  you  take  an  inventory  of  stock? Date  of  last  inven- 
tory      If  you  have  borrowed  money  in  the  business,  state 

what  amount  is  secured  and  in  what  way 

— _ Are  any  merchandise  creditors 

secured  in  any  way? Have  you  any  judgments,  judgement  notes, 

chattel  mortgages,  or  other  liens  against  you,  recorded  or  unrecorded  ?     If  so,  describe 

Suits  pending  and  of  what  nature-..........~.........~~. ^ 

~- If  you  have  pledged  or  transferred  outstanding  accounts  or  property 

remaining  under  your  control,  state  amount  thereof  and  amount  received,  or  to  be  received, 

on  account  of  such  pledge  or  transfer. 

Keep  bank  account  with 

What  books  of  account  do  you  keep?.. 


Buy  principally  from  following  firms  : 

Name 

Address 

What  line  of 
business? 





The  above  statement,  both  printed  and  written,  has  been  carefully 
read  by  the  undersigned,  and  is  a  f  uil  and  correct  statement  of  my  or  our 
financial  condition  as  of. — 191 

Firm  signature. — «.. ~.... • — ......~..~ • 

By -whom  signed  ••• ....^...m < »♦« -ft  member  of  the  firm. 

Alt  questions  must  'be  answered,  insert  ciphers  in  absence  of  any  amount.  When  the 
Words  **  Yes,"  "No"  or  "  None"  will  correctly  answer  the  questions,  write  them  in  their 
proper  places. 


Form  14c.     Property  Statement — Individual  or  Partnership   (page  3). 


250 


APPENDIX 


To  RICH,  MANN  &  CO.,  New  York 

For  the  purpose  of  obtaining  credit  now  and  hereafter  for  goods  purchased,  we  here- 
with submit  to  you  the  following  statement  of  our  resources  and  liabilities,  and  will  im- 
mediately notify  you  of  any  material  change  in  our  financial  condition. 

In  consideration  of  your  granting  credit  to  the  undersigned,  we  agree  that  in  case  of 
our  failure  or  insolvency,  or  in  case  we  shall  make  any  assignment  for  the  benefit  of  credit- 
ors, bill  of  sale,  mortgage,  or  other  transfer  of  our  property,  or  shall  have  our  stock  or 
plant  attached,  receiver  appointed,  or  should  any  judgment  be  entered  against  us,  then  all 
and  every  of  the  claims  which  you  have  against  us  shall  at  your  option  become  immediately 
due  and  payable,  even  though  the  term  of-cfedit  has  not  expired.  All  goods  hereafter 
purchased  from  you  shall  be  taken  to  be  purchased  subject  to  the  foregoing  conditions  as 
a  part  of  the  terms  of  sale. 


Corporation    style . 
City , 


County State. 


BUSINESS  ASSETS 

Value  of  Merchandiseon  hand  at  cost 

If  manufacturing,  raw  material,  $ finished,  $. 

unfinished,  $. 

Notes  and  accounts,  cash  value 

Cash  in  hand 

Cash  in  bank 

Bills  or  accounts  receivable,  due  from  officers 

Patents  and  patterns 

Fixtures  and  machinery 

Total  real  estate,  cash  value $ 

Total  encumbrances  on  real  estate,  $. 

Equity 

Total  Active  Business  Asseta 


[                Dollars 

Cents  1 

1 

1        1        1 

1        1 

J) 

BUSINESS  LIABILITIES. 

Owe  for  mdse.,open  acct, 

ofwhich$ is  past  due 

Owe  for  notes  for  mdse 

Owe  banks 

Owe  for  bills  for  paper  sold 
Owe  others  for  bor'd  money 

Owe  taxes  and  rent 

Mtgs.  on  fixt's  and  mach'y 


Dollars 

Cents  ii 

II 



Total  Business  Liabilities- 
Total  net  worth.- 


TiTT 


I   I   I  .1   I   I   I    II 


Please  state  location  and  description  of  each  parcel  of  real  estate,  and  cash  valuation 
of,  and  encumbrances  on,  each — „ 


Form  15a.    Property  Statement— Corporation  (page  2). 


FORMS 

{Accommodation  indorsements ...... 
Indorsed  bills  receivable  and  outstanding. 


251 


OFFICERS. 

Name  in  Full 


President  _ 

Vice-Prest 

Secretary   

Treasurer  

DIRECTORS. 

Name  in  Full 


Authorized   capital Subscribed Paid  in .-~. 

How  paid  in:  Cash,  $ _ Other  property Description  of 

other  property,  and  how  valued 

In  whose  name  is  title  to  real  estate  held? 

Incorporated  in  what  State  and  under  what  general 

laws  or  special  act? Nature  of   business? 

Date  of  charter? ...Suits  pending,  and  of  what  nature? 

Are  any  merchandise  creditors  secured  in  any 

way? Amount  of  annual  business Annual  expenses 

'Annual  dividends When  was  last  dividend  declared  ? Rate 

Insurance  carried  on  merchandise Fixtures  and  machinery. 

Real  estate Regular  time  of  taking  inventory. Keep 

bank    accounts   with , 

Keep-    following   books    of    account „ 

If  you  have  pledged  or  transferred  outstanding  accounts  or  property^  remaining*  under 
your  control,  state  amount  thereof  and  amount  received,  or  to  be  received,  on  account  of 
such  pledge  or  transfer 


Buy  principally  from  following  firms  : 

Name 

Address 

What  line  of 
business? 





The  above  statement,  both  printed  and  written,  has  been  carefully  read  by  the 
undersig^ned,  and  is    a   full   and   correct   statement  of  •  our   financial    conditiou  as  of 

-^ 191 

Corporation  Signature .......^.^ 

By 

Date ■ - 

All  questions  must  be  answered,  insert  ciphers  in  absence  of  any  amount  When  thok 
words  "Yes,"  "  No"  or  "  None"  will  correctly  answer  the  questions,  write  them  in  their 
proper  places. 

Form  15b.    Property  Statement — Corporation  (page  3). 


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Form  16.    Property  Statement — Individual 


FORMS 


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or  Partnership.     (See  page  246.) 


254 


APPENDIX 


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256 


APPENDIX 


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Form  18.  Financial  Statement.  This  is  an  excellent  form  of 
not  a  question  on  it  but  which  can  and  should  be  readily  answered 
because  of  the  space  provided  on  the  back  of  the  sheet  (not  shown) 


FORMS 


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financial  statement,  and  while  it  goes  into  details  thoroughly,  there  is 
even  by  small  country  merchant.  This  form  of  statement  is  desirable 
for  a  list  of  references. 


258 


APPENDIX 


STATEMENT  OF 


M.  C.  KISER  Co'mPANY,  Atlanta.  Ga. 

Firm  Name •. — •*■  O 

Partner's  Name - .— 

When  commenced  business Capital  invested  $ 

Amount  annual  business  $ Ever  tailed? If  so,  how. settled 

Amount  of  insurance  on  stock  of  goods,  $ _, ,  on  buildings,  J, 

Are  you  security  on  any  bond,  or  do  you  endorse? 1 

ASSETS 

Amount  of  stock  now  on  hand  and  when  invoiced ■ ^.J ^ __ I 

Amo>in^  of  good  notes  and  accounts  now  on  hand  valued  at . S 

"      doubtful  "      "       "  ' $ valued  at.... $ 

Cash  on  hand ^ $ 

Value  of  real  estate  and  in  whose  name .— « $ 

$ 

Other  Assets,  consisting  of * ■• 

.: ^     % 

- t. 

tive  Stock r - ^-- * , 


Total  assets - — — S - 

LIABILITIES 

Amount  owing  for  merchandise  on  open  account,  and  not  due _ . $ ■ — 

"         ".     "          "  "    "  "       past  due... $..-^ 

"         "      ■•         "        closed  by  note,  not  due - $ 

"     "         "  "'    "     "    past  due i $ 

Amount  owing  for  borrowed  money,  and  when  due  .  ... $ 

"         "      fpr  borrowed  money ,to  friends  and  relatives  not  included  in  above $ 

"        "     on  real  esti^te,  and  when  due ^ u .  $ 

Amount  owing  in  any  other  manner -...- * '^ 


Total  liabilities r— »- 

Amount  mortgages  or  other  liens  on  real  estate . 


Amount  of  mortgage  or  other  liens  on  stock  of  ijierchandise ^ . _ 

To  whom  given  and  when  due -— — .. 

Amount  of  notes  and  accounts  held  as  collateral  security  by  other  creditors,  or  in  any  way  pledged  to  security,  and  to  whom. 

To  whom  indebted,  and  amounts  due  each  largest  creditofs      ; .. 


What  property  in  wife's  name ^. 

The  abovtj  statement  is  made  for  the  purpose  of  obtaining  credit  from  M.  C.  KISER  COMPANY,  now,  or  hereafter,  and  the  same  shall 
stand  good  as  to  subsequent  purchases,  unless  there  should  I 
making  further  purchases  from  them*    And  as  a  f     ""-'  *" 


ning  creoit  rrom  m.  i^.  rwi&t^K  J-umrArti,  now,  or  nerearter,  ana  ine  same  snail 
Id  be  a  material  change,  in  which  case  (I  or  we)  will  notify  them  in  writing  before 
I  to  obtaining  credit  from  said  M.  C.  KISER  COMPANY,  now  or  hereafter,  (T  or  w«> 
waive  any  and  all  homestead  or  exemption  rights,  that  (I  or  either  of  us)  may  have  under  or  by  virtue  of  the  Constitution  or  Laws  of  Georgia  or 
any  other  State,  or  the  United  States,  as  against  any  debt  which  we  may  owe  the  said  M.  C.  KlSER  COMPANY,  and  fail  to  pay  them  therefor. 


Sixn  here  full  name  of  firm... . 

Date 

.  191  ..              By  whom  alKned. 

Form  No.  1 

nber  of  the  firm 


Form  19.  Financial  Statement.  This  form  is  interesting  in  that 
it  contains  what  is  known  as  the  "Georgia  Waiver"  clause.  The  Con- 
stitution of  Georgia  allows  a  man  to  waive  his  homestead  rights,  and 
it  is  the  custom  to  have  the  waiver  clause  in  contracts  in  this  state. 
The  same  is  applicable  to  any  other  state  which  by  law  permits  the 
waiving  of  homestead  exemptions. 


FORMS 


259 


To  ANDERSON-DULIN-VARNELL  CO- 

Memorandum  of  the  Financial  Condition  of 


ASSETS 

DoIIk 

Ctf. 

UABIUTIES 

Dolb. 

CU. 

Stock  of  Merchandise  on  hand  .... 
Notes  and  Accounts  collectable  .... 

Cash  on  hand  and  in  Bank 

Real  Estate •       •  •  - 

For  Merchandise  . . 

For  Borrowed  Money  Due  Bank  .....  .  . 

Wh^n-  dii» 

For  Borrowed  Money  Due  elsewhere  .  . 
Wh-n  fill" 

For  money  due  depositors 

Encumbrance  on  Real  Estate 

Encumbrance  on  Stock 

Other  UabiliUes .  .. 

Other  Assets •  .  • 

Total  Assets         .    .  .  ^         .... 

TotalLiabilities 

TotalLiabilities 

1 

Does  the  above  statement  show  all  your  debts  and  liabilities  of  every  kind  whatsoever?- 
When  did  you  take  an  inventory? -. 


What  amount  of  your  merchandise  obligations  is  past  due?- 
To  whom  do  you  owe  overdue  bills?  — ., : — ^ — 


Other  insurance,  $- 


Insurance  on  stock  of  goods,  $ , 

Annual  sales.  $. — Clerk  hire,  per  year,  $ Store  rent,  per  year,  $- 

From  what  firms  have  you  been  making  your  largest  purchases  in  the  past  year  or  two? 


Name  of  each  partner 
REMARKS: 


Date- 


-191 


ANDERSON-DULIN-VARNELL  CO,  KnoxviUe,  Tenn.: 

Gentlemen— The  above  statement  and  answers  to  interrogations  are  reliable,  and  are  made  to  your  firm  in 

good  faith,  and understand  and  admit  that  any  credit  which  you  may  grant  to 

now  or  hereafter,  is  based  on  an  absolute  assurance  of  their  correctness 


Sign. 


Form  20.  Financial  Statement.  This  statement  is  used  by  a  large 
dry-goods  house,  principally  among  small  merchants.  It  is  easily  filled 
out,  the  questions  being  few  and  simple.  It  meets  all  the  requirements 
of  the  false-statement  laws  of  the  different  states,  and  was  used  by 
the  author  for  a  number  of  years  in  handling  credits  for  this  house. 


26o  APPENDIX 


Some  Good  Reasons  Why  Yoa  Should  Make  a  Statement 


1.  You  are  doubtless  aware  that  it  is  an  invariable  rule  with  merchants  to 
inquire  into  the  commercial  standing  of  their  customers,  it  being  as  necessary 
for  them  to  know  the  responsibility  of  a  customer  (probably  never  seen)  as 
it  is  for  a  banker  to  know  the  responsibility  of  an  applicant  for  a  loan. 

2.  Information  as  to  the  standing  of  merchants  is  obtained  largely  through 
local  correspondents,  but  such  information  is  often  found  to  be  incorrect,  for  the 
reason  that  correspondents  either  do  not  possess  the  facts,  or,  through  preju- 
dice, wilfully  misrepresent  them,  and  as  a  result  the  credit  of  those  reported 
is  often  unjustly  impaired. 

Our  object  in  addressing  you  direct  is  to  remedy  this  injustice  by  giving 
you  an  opportunity  to  furnish  a  statement  of  the  facts  in  your  own  behalf, 

3.  We  receive  statements  from  merchants,  rich  and  poor,  those  who  dis- 
count, and  those  less  fortunate,  and  we  find  that  seldom  is  the  merchant's  own 
statement  of  the  facts  not  more  favorable  as  a  basis  of  credit  than  the  informa- 
tion received  from  other  sources,  which  furnishes  a  good  reason  why  a  merchant 
should  recommend  himself  rather  than  leave  it  to  some  disinterested  person 
to  do. 

4.  Every  merchant  knows  that,  to  buy  on  time,  he  must  have  credit;  that 
anything  unfavorably  affecting  that  credit  decreases  his  purchasing  power.  A 
willingness  to  furnish  a  statement  of  his  business  condition,  even  though  the 
capital  be  small,  always  strengthens  the  confidence  of  the  trade  in  a  merchant's 
honest  intention,  which  is  a  strong  factor  in  establishing  or  sustaining  a  credit, 
especially  to  those  of  limited  means. 

5.  A  merchant  who  is  perfectly  solvent,  and  who  fails  to  furnish  a  state- 
ment of  his  condition  because  he  is  behind  in  payments,  makes  a  great  mistake, 
for  the  reason  that  by  other  methods  that  fact  is  uncovered,  which  if  reported 
alone  would  of  course  be  decidedly  unfavorable,  while  an  explanation  as  to  the 
cause  of  the  delay  from  the  merchant  himself,  together  with  a  showing  of  his 
assets  and  liabilities,  might  prove  him  to  be  perfectly  safe  and  deserving  of 
further  credit,  thus  allaying  any  fear  or  apprehension  of  creditors,  which  the 
withholding  of  a  statement  would  only  still  further  increase, 

6.  While  merchants  require  a  capital  in  proportion  to  the  volume  of  their 
business,  it  is  a  mistake  to  suppose  that  those  of  small  means  cannot  be  in  good 
credit.  Any  merchant  who  can  (and  will)  show  that  he  is  in  a  condition  to 
succeed,  is  entitled  to  and  will  receive  credit  for  his  needs,  and  a  merchant  who 
is  unwilling  or  will  not  take  the  trouble  to  recommend  himself  cannot  reason- 
ably expect  the  confidence  or  recommendation  of  others,  nor  will  any  good 
business  house  knowingly  extend  credit  to  a  concern  of  doubtful  means  and 
uncertain  promptitude. 

7.  Our  object  in  asking  this  information  is  solely  to  enable  us  to  give  de- 
serving merchants  the  credit  to  which  they  are  justly  entitled. 

Trusting  you  will  appreciate  our  fairness,  and  in  your  own  interest  comply 
with  our  request,  we  are, 

Yours  respectfully, 

GEO.  D.  WITT  SHOE  COMPANY 


Form  21.  Financial  Statement — Introduction.  This  is  the  first 
page  of  a  three-page  statement  blank  used  by  a  manufacturing  com- 
pany. The  inside  pages,  as  well  as  this  first  page,  are  similar  to  the 
N,  A.  C.  M.  blank,  Form  14.  This  first  page  is  interesting  and  con- 
tains much  that  is  good  for  any  merchant  to  know. 


FORMS  261 


€uei<^ 


From, 


To  Hulman  &  Co  ,  of  Terre  Haute,  Indiana 

For  value  received,  and  in  consideration  that  you  shall  here- 
after give  credit  to 


from  time  to  time  in  the  course  of  h   business  as  retail  grocer 
in ,  I, 


do  hereby  undertake  and  guarantee  the  payment  of  any  sums  that  "the 

said may  become  indebted  to  you, 

not  to  exceed  the  sum  of dollars 

$( ) 

This  instrument  is  intended  as  a  general,  unlimited,  continuing 
guaranty,  whereby  I  undertake  and  guarantee  as  a  primary  liability 
uponjne,  any  and  all  balance  of  indebtedness  due  you  from 
— or  that  may  hereafter  become 


due  and  any  contract  entered  into  by. 


and  Hulman  &  Co  creating  or  extending  such  indebtedness,  or  chang- 
ing the  form  thereof,  shall  be  binding  upon  us,  without  notice,  and 
render  us  liable  under  this  guaranty 

(S'ign  full  name) — — 


(Postoffice  Address). 

(County). 

(Date) . (State)- 


Form  22.  Guarantee  Letter.  This  form  of  guaranty  was  sup- 
plied by  the  National  Association  of  Credit  Men.  It  is  recommended 
for  its  simplicity  as  well  as  for  the  fact,  as  stated  in  the  form,  that  it 
is  a  "general,  unlimited,  continuing  guaranty." 


262  APPENDIX 


GUARANTY 

The  Undersigned,   for  and  in  consideration  of  one  dollar 

($1.00)  in  hand,  paid  by 

of hereinafter  called  the 

Purchaser,  the  receipt  whereof  is  hereby  acknowledged,  and  the 
further  consideration  of  enabling  the  said  Purchaser  to  buy 
goods,  wares,  and  merchandise  on  credit  of  Green  &  De  Laittre 
Company,  Minneapolis,  Minnesota,  hereinafter  called  the  Vendor, 
hereby  jointly  and  severally,  whether  signed  by  more  than  one 
person  or  not,  guarantee  the  payment  of,  and  bind  ourselves  per- 
sonally, our  heirs,  executors,  and  administrators  to  said  Vendor, 
for  the  payment  of  all  debts  of  every  kind,  name,  and  nature, 
including  interest,  which  the  said  Purchaser  is  now  owing,  or 
may  hereafter  owe,  the  said  Vendor,  whether  due  or  not  due, 
provided,  however,  that  the  liability  of  the  undersigned  here- 
under shall  not  be  for  a  greater  amount  than 

Dollars  ($ )  and  interest. 

The  undersigned  agree  that  the  debts,  payment  of  which  is 
hereby  guaranteed,  may,  by  note  or  otherwise,  be  changed  in 
form,  extended,  or  renewed  at  the  option  of  said  Vendor  without 
notice  to  the  undersigned,  and  the  liability  of  the  undersigned 
shall  not  be  affected  by  such  change,  extension,  or  renewal ;  that 
this  guaranty  shall  remain  in  full  force  and  effect  up  to  such 
date  as  the  said  Vendor  shall  have  received  at  its  office  in 
Minneapolis,  Minnesota,  written  notice  from  the  undersigned  to 
cease  selling  the  said  Purchaser  on  the  strength  of  his  guaranty ; 
that  the  Vendor  may  at  its  option  extend  credit  to  the  Purchaser 
to  an  amount  in  excess  of  the  limit  to  this  guaranty  without 
impairing  our  joint  and  several  liabilities  hereunder;  that  should 
said  Vendor  commence  suit  against  the  Purchaser,  or  against 
the  undersigned  on  this  guaranty,  to  pay  a  reasonable  attorney 
fee,  and  that  the  same  may  be  taxed  against  the  undersigned  as 
part  of  the  costs  in  said  action. 

The  undersigned  hereby  waives  notice  from  the  Vendor  of 
the  amount  of  indebtedness,  default  in  payment,  or  of  the  accept- 
ance of  this  guaranty. 

In  Witness  Whereof,   We  have  hereunto   subscribed   our 

names  at 

on  this day  of ,  A.  D.,  19 


Witness 
Witness 


Form  23.  Guaranty.  This  form  is  used  and  recommended  by  the 
National  Association  of  Credit  Men.  It  covers  all  necessary  legal 
points. 


FORMS 


263 


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264 


APMNDIX 

14^R.  S.-4-28 

THE   CREDIT    CLEARING   HOUSE   REPORT 

May  8,  1914 


o 

$ 


J  320  210  320  0  discounts 

D  0  250  0  0  first  order 

B  275  0  123  0  when  due 

M  40  0  40  0  when  due 


nn 

0 

0 

0 

0 

REFUSED 

B 

370 

0 

158 

0 

discounts 

B 

378 

0 

0 

0 

discounts 

Dd 

0 

300 

0 

0 

first  order 

C 

700  1661 

700 

0 

discounts 

D 

UU 
D 

0 

0 

1840 

350       0     0 

110       0     0 

0  1840  250 

first  order 
first  order 
little  slow 

UU 

104 

0 

0 

0 

slow 

B 

558 

0 

0 

0 

slow 

CHICAGO  DISTRICT 
in  30  days-sold  10/22/13 
to    5/4/14 -terms    60 
days-due      8/1/14-for 
shipment  9/1/14. 
LOUISVILLE  DISTRICT 
for  shipment. 
ST.  LOUIS  DISTRICT 
sold  Fall  1913  to  date- 
terms,  May. 
sold  Oct.  21/13  to  May 
16/14-terms    2-10-30 
net. 
CINCINNATI  DISTRICT 
$86.00   March,    1914-un- 

SATISFACTORY  REPORTS. 

in   30    days-sold    March 

1914  to  present-terms 

reg.,  due  Jan. 
in    10    days-sold    Nov., 

1913,    to    Feb.,    1914- 

terms  90  days. 

BALTIMORE  DISTRICT 
sold     since    Fall     1913- 
terms  regular. 


sold    Aug.,    1913  -  terms 

reg. 
60  days-sold  Fall  1913- 

terms  reg. 
30  to  90  days-sold  Aug., 

1913,    to    Oct.,     1913- 

terms  reg. 


Form  25.  Credit  Clearing  House  Report.  This  report  illustrates 
House  report  on  a  firm  in  Alabama  which  began  to  place  orders 
warning  notice  to  subscribers  as  soon  as  this  report  was  cleared.  In 
a  nurnber  of  references  report  this  party  as  "discounting."  In  this 
lack  of  space,  the  report  from  the  Southeastern  District,  which  ap- 


$ 

1 
i-i 

O 

$ 

1  s 

O     P 

$    $ 

183 

0 

0     0 

discounts 

FORMS  265 


NEW  YORK  DISTRICT 
in    30    days-sold    1913- 
terms  2-10-60  net. 

F  89       0      89    89      slow  sold  1913-terms  2-10,  due 

Dec. 

J  180        0    180  180      IN  HANDS  OF  ATTY.  sold  one  bill  Nov.  1913- 

terms  reg.,  due  Feb. 

B  0    254       0      0      ORDER  REFUSED        4/10/14-$254.00. 

E  0    632        0      0      first  order  for  shipment  8/15/14. 

PHILADELPHIA  DISTRICT 

C  0       0       0      0      REFUSED  a/c  credit  $452.00  Spring 

1914. 

dd      2045        0  2045      0      slow  60  days-sold  Aug.,  1913, 

to   March,    1914-terms 
reg. 


NN 

0 

75 

0     0 

first  order 

B 

0 

240 

0      0 

first  order 

for  shipment  8/15/13. 

B 

173 

0 

173      0 

first  trans. 

sold  5/27/14-terms  reg., 
due  5/27/14. 
NEW  ORLEANS  DISTRICT 

d 

262 

0 

262  247 

first  trans. 

sold  2/20/14  to  3/10/14- 
terms     60     days  -  due 
April  20  and  May  10. 

d 

226 

0 

0      0 

COLL.  BY  ATTY.        sold  Oct.,  1913-terms  60 

days. 

MEMPHIS  DISTRICT 

D 

871 

750 

21    21 

paid 

$200.00  cash  and  by  in- 
stalments   on   balance, 
and  on  which  are  still 
paying-sold     one     bill 
October,  1913. 
CLEVELAND  DISTRICT 

E 

0 

130 

0      0 

first  order 

for  shipment  3/1/14. 
BOSTON    DISTRICT 

B 

130 

0 

130  130 

when  due 

sold  two  bills-terms  3-30 
-net  60-due  July,  1914. 

cj 

0 

450 

0      0 

first  order 

dd  BALTIMORE  DISTRICT      coll. 

BY  DRAFT  $165.00,  Feb.,  1914. 

the  importance  of  securing  credit  information.  It  is  a  Credit  Clearing 
throughout  the  United  States.  The  Credit  Clearing  House  issued  a 
June,  1914,  the  subject  of  the  report  went  into  bankruptcy.  Note  that 
report  the  usual  first  column  of  index  figures  has  been  omitted.  For 
peared  in  the  original  report,  has  been  omitted. 


266  APPENDIX 

In  the  United  States  District  Court  for  the  Eastern  District  of 
Tennessee,  Northern  Division 

In  the  Matter  of  )   No 

John  Doe,  l 

Alleged  Bankrupt   )   I"  Bankruptcy 

To  the  Honorable ,  Judge  of  Said  Court  : 

The  Petition  of  Richman  Company,  a  Corporation  organized  and 
existing  under  the  laws  of  the  State  of  New  York,  doing  business  at 
75  Union  Street,  New  York  City;  Richard  Roe,  an  individual  doing 
business  in  Lynchburg,  Virginia;  and  Jones  &  Smith,  a  partnership, 
comprised  of  Thomas  Jones  and  John  Smith,  doing  business  in  Bristol, 
Tennessee,  respectfully  shows: 

1. — That  John  Doe,  for  the  greater  portion  of  six  months  next 
preceding  the  date  of  the  filing  of  this  petition  has  had  his  place  of 
business  and  has  resided  in  Jonesville,  Union  County,  Tennessee,  and 
District  aforesaid,  having  been  engaged  in  the  general  merchandise 
business  and  owes  debts  to  the  amount  of  $1,000.00  and  over. 

2. — Your  Petitioners  are  creditors  of  the  said  John  Doe,  having 
provable  claims,  amounting  in  the  aggregate  in  the  excess  of  securities 
held  by  them  in  the  sum  of  $500,00,  and  that  neither  of  your  Petitioners 
is  entitled  to  priority  of  payment  on  its  said  claim  within  the  meaning 
of  Section  64-B  of  the  Bankruptcy  Act  of  1898,  nor  has  either  of  your 
Petitioners  received  a  preference  within  the  meaning  of  Section  60- AB 
of  said  law  as  amended. 

3. — That  said  John  Doe  is  neither  a  wage  earner  nor  person 
engaged  chiefly  in  the  tillage  of  the  soil. 

4. — That  the  nature  and  amount  of  your  Petitioners'  claims  are  as 
follows : 

Richman  Company,  notes  for  merchandise $528.00 

Richard  Roe,  open  account  for  merchandise 27.50 

Jones  &  Smith,  open  account  for  merchandise 150.00 

5. — ^Your  Petitioners  further  represent  that  the  said  John  Doe  is 
insolvent,  and  that  within  four  months  next  preceding  the  date  of  the 
filing  of  this  petition,  the  said  John  Doe  committed  an  Act  of  Bank- 
ruptcy in  that  he  did  heretofore  on  or  about  the  14th  day  of  October, 
1914,  transfer  a  certain  portion  of  his  property,  to  wit :  his  entire  stock 
of  goods  including  fixtures  located  at  Jonesville,  Tennessee,  to  Blank 

Form  26.  Petition  in  Bankruptcy.  A  similar  oath  is  made  by  the 
sample  petition,  Samuel  Adams,  Attorney-at-Law,  makes  a  similar  oath 
Petitioning  Creditors. 


FORMS  267 

Grocery  Co.,  one  of  his  creditors,  with  intent  to  prefer  such  creditor 
over  his  other  creditors;  said  transfer  consisting  in  the  execution  and 
deHvery  of  a  chattel  mortgage  for  $3,000.00  to  the  said  Blank  Grocery 
Co.,  the  same  being  dated  October  1,  1914,  but  was  not  filed  for  record 
until  October  14,  1914,  and  your  Petitioners  did  not  know  of  the 
existence  of  said  mortgage  until  after  October  14,  1914. 

Wherefore,  your  Petitioners  pray  that  service  of  this  petition  with 
a  subpoena  may  be  made  upon  said  John  Doe,  as  provided  by  said 
Bankruptcy  Law  of  1898,  as  amended,  and  that  said  John  Doe  may  be 
adjudged  a  Bankrupt  within  the  purview  of  said  Law. 

Rich  MAN  Company, 
By  Samuel  Adams, 

Attorney-at-Law  for  said  Co. 

Richard  Roe, 

By  Samuel  Adams, 

Attorney-at-Law  for  said  R.  Roe 

Jones  &  Smith, 
By  John  Smith, 

A  member  of  the  firm 

Samuel  Adams, 

Attorney  for  Petitioning  Creditors, 

Address,  Knoxville,  Tennessee. 


United  States  of  America 
Northern  District  of  Tennessee 
County  of  Sullivan 

In  person  before  the  undersigned,  came  John  Smith,  who  on  oath 
said  that  he  is  a  member  of  the  firm  of  Jones  &  Smith,  being  one  of 
the  Petitioners  mentioned  and  described  in  the  foregoing  petition  and 
does  make  solemn  oath  that  the  statements  of  fact  contained  in  the 
foregoing  petition  are  true. 


John  Smith 


Sworn  to  and  subscribed  before  me  this 
the  10th  day  of  December,  1914, 
J.  Y.  Hopkins, 
Notary  Public,  Sullivan  County,  Tenn. 


other  creditors  in  this  petition  where  practicable.     Also,  as  in  this 
as  to  the  statements  of  fact,  alleging  that  he  is  Attorney-at-Law  for  the 


268  APPENDIX 

UNITED    STATES    OF   AMERICA,    EASTERN   DISTRICT    OF 

TENNESSEE,  NORTHERN   DIVISION 

In  the  United  States  District  Court,  in  and  for  said  District. 


In  the  matter  of 

JOHN  DOE 

Jonesville,  Tenn. 

Bankrupt 


No. 


In  Bankruptcy, 
Proof  of  Claim. 


State  of  New  York,  County  of  Kings,  ss. 

At  New  York,   in  said   County  and   State,   on  the  12th  day  of 

December  A.  D.,  1914,  came  JOHN  RICHMAN 

and  made  oath  and  says : 

That  he  is  Treasurer of  the  RICHMAN 

COMPANY,  a  corporation  incorporated  by  and  under  the  laws  of  the 
State  of  New  York,  and  carrying  on  business  at  New  York,  in  the 
County  of  Kings  and  State  of  New  York,  and  that  he  is  duly  authorized 
to  make  this  proof. 

That  the  above  named  bankrupt,  the  person  by  or  against  whom  a 
petition  for  adjudication  of  bankruptcy  has  been  filed,  was  at  and 
before  the  filing  of  said  petition,  and  is  still  justly  and  truly  indebted 
to  said  RICHMAN  COMPANY,  in  the  sum  of  Five  Hundred  and 
Twenty-eight  Dollars,  including  $1.25  interest  to  date  of  adjudication. 
That  the  nature  and  consideration  of  said  debt  is  as  follows : 

Dry  Goods  and  Notions  as  per  itemized  statement  attached  hereto 
sold  and  delivered  to  the  bankrupt  at  his  special  instance  and  request. 

That  no  part  of  said  debt  has  been  paid ;  that  there  are  no  set-offs 
or  counter  claims  to  the  same  and  that  claimant  has  not  nor  has  any 
person  by  its  order  or  to  the  knowledge  or  belief  of  said  deponent,  for 
claimant's  use,  had  or  received  any  manner  of  security  for  said  debt, 
whatever,  nor  has  any  note  been  given  therefor,  nor  has  any  judgment 
been  rendered  thereon.  And  this  deponent  further  says  that  he  is  duly 
authorized  by  his  principal  to  make  this  affidavit,  and  that  it  is  within 
his  knowledge  that  the  aforesaid  debt  was  incurred  as  and  for  the 
consideration  above  stated,  and  that  such  debt  to  the  best  of  his  knowl- 
edge and  belief,  still  remains  unpaid  and  unsatisfied. 

JOHN  RICHMAN, 

(Treasurer  Richman  Company) 
Subscribed  and  sworn  to  before  me,  this  12th  day  of  December,  1914, 
John  McAllister, 

Notary  Public,  Kings  County,  New  York. 

My  commission  expires  April  20,  1915. 

Form  27  (face).    Claim  in  Bankruptcy. 


FORMS 


POWER   OF  ATTORNEY 


269 


In  the  Matter  of 
JOHN  DOE 
Jonesville,  Tenn. 
Bankrupt. 


In  Bankruptcy. 


To  Samuel  Adams,  Attorney, 
Knoxville,  Tenn. 

The  RICHMAN  COMPANY,  a  corporation  of  New  York,  doing 
business  at  New  York,  Kings  County,   New  York,  by  its  Treasurer 

,  JOHN  RICHMAN ,  of  said 

State  and  County,  does  hereby  authorize  you  or  any  of  you  to  attend 
the  meeting  of  creditors  in  this  matter,  advertised  or  directed  to  be 
holden  at  Jonesville,  Tennessee,  on  the  20th  day  of  December,  191 4, 
before  Hon.  P.  H.  ADAMS,  referee  in  bankruptcy,  or  any  adjourn- 
ment thereof,  and  then  and  there  for  said  RICHMAN  COMPANY, 
and  in  its  name  to  vote  for  or  against  any  proposal  or  resolution  that 
may  be  lawfully  made  or  passed  at  such  meeting  or  adjourned  meeting 
and  in  the  choice  of  trustee  or  trustees  of  the  estate  of  said  bankrupt. 
In  Witness  Whereof,  the  RICHMAN  COMPANY  has  caused 
this  Power  of  Attorney  to  be  signed  and  its  seal  affixed,  this  12th  day 
of  December,  191 4. 

RICHMAN  COMPANY,        (Seal) 
By  John  Richman,  Treasurer. 


Signed,  sealed  and  delivered  in  presence  of 
William  Russell, 

Acknowledged  before  me,  this  12th  day  of  December,  1914. 
John  McAllister, 

Notary  Public,  Kings  County,  New  York. 


Form  27  (reverse).    Power  of  Attorney. 


270 


APPENDIX 


THE   NATIONAL   BANKRUPTCY   ACT 


An  Act  to  Establish  a  Uniform  System  of  Bankruptcy  Throughout 
the  United  States.* 

CHAPTER  I. 

DEFINITIONS. 

§  1.  Meaning  of  Words  and  Phrases. — a.  The  words  and 
phrases  used  in  this  act  and  in  proceedings  pursuant  hereto  shall, 
unless  the  same  be  inconsistent  with  the  context,  be  construed  as 
follows:  (1)  "A  person  against  whom  a  petition  has  been  filed" 
shall  include  a  person  who  has  filed  a  voluntary  petition;  (2)  "ad- 
judication" shall  mean  the  date  of  the  entry  of  a  decree  that  the 
defendant,  in  a  bankruptcy  proceeding,  is  a  bankrupt,  or  if  such 
decree  is  appealed  from,  then  the  date  when  such  decree  is  finally 
confirmed;  (3)  "appellate  courts"  shall  include  the  circuit  courts 
of  appeals  of  the  United  States,  the  supreme  courts  of  the  Terri- 
tories, and  the  supreme  court  of  the  United  States;  (4)  "bankrupt" 
shall  include  a  person  against  whom  an  involuntary  petition  or  an 
application  to  set  a  composition  aside  or  to  revoke  a  discharge 
has  been  filed,  or  who  has  filed  a  voluntary  petition,  or  who  has 
been  adjudged  a  bankrupt;  (5)  "clerk"  shall  mean  the  clerk  of  a 
court  of  bankruptcy;  (6)  "corporations"  shall  mean  all  bodies  hav- 
ing any  of  the  powers  and  privileges  of  private  corporations  not 
possessed  by  individuals  or  partnerships,  and  shall  include  limited 
or  other  partnership  associations  organized  under  laws  making  the 
capital  subscribed  alone  responsible  for  the  debts  of  the  associa- 
tion; (7)  "court"  shall  mean  the  court  of  bankruptcy  in  which  the 
proceedings  are  pending,  and  may  include  the  referee;  (8)  "courts 
of  bankruptcy"  shall  include  the  district  courts  of  the  United  States 
and  of  the  Territories,  the  supreme  court  of  the  District  of  Colum- 
bia, and  the  United  States  court  of  the  Indian  Territory,  and  of 
Alaska;  (9)  "creditor"  shall  include  anyone  who  owns  a  demand  or 
claim  provable  in  bankruptcy,  and  may  include  his  duly  authorized 
agent,  attorney,  or  proxy;  (10)  "date  of  bankruptcy,"  or  "time  of 
bankruptcy,"  or  "commencement  of  proceedings,"  or  "bankruptcy," 
with  reference  to  time,  shall  mean  the  date  when  the  petition  was 
filed;  (11)  "debt"  shall  include  any  debt,  demand,  or  claim  provable 
in  bankruptcy;  (12)  "discharge"  shall  mean  the  release  of  a  bank- 
rupt from  all  of  his  debts  which  are  provable  in  bankruptcy,  except 
such    as    are    excepted    by    this    act;     (13)    "document"    shall    in- 


•  The  National  Bankruptcy  Act  was  approved  July  1,  1898,  and  amended 
February  5,  1903,  June  15,  1906,  and  June  25,  1910.  The  Act  as  given  herewith 
contains  all  of  these  amendments. 


THE    NATIONAL    BANKRUPTCY    ACT 


271 


elude  any  book,  deed,  or  instrument  in  writing;  (14)  "holiday"  shall 
include  Christmas,  the  Fourth  of  July,  the  Twenty-second  day  of 
February  and  any  day  appointed  by  the  President  of  the  United 
States  or  the  Congress  of  the  United  States  as  a  holiday  or  as  a 
day  of  public  fasting  or  thanksgiving;  (15)  a  person  shall  be 
deemed  insolvent  within  the  provisions  of  this  act  whenever  the 
aggregate  of  his  property,  exclusive  of  any  property  which  he  may 
have  conveyed,  transferred,  concealed,  or  removed,  or  permitted  to 
be  concealed  or  removed,  with  intent  to  defraud,  hinder  or  delay 
his  creditors,  shall  not,  at  a  fair  valuation,  be  sufficient  in  amount 
to  pay  his  debts;  (16)  "judge"  shall  mean  a  judge  of  a  court  of 
bankruptcy,  not  including  the  referee;  (17)  "oath"  shall  include 
affirmation;  (18)  "officer"  shall  include  clerk,  marshal,  receiver, 
referee,  and  trustee,  and  the  imposing  of  a  duty  upon  or  the  for- 
bidding of  an  act  by  any  officer  shall  include  his  successor  and 
any  person  authorized  by  law  to  perform  the  duties  of  such  officer; 
(19)  "persons"  shall  include  corporations,  except  where  otherwise 
specified,  and  officers,  partnerships,  and  women,  and  when  used 
with  reference  to  the  commission  of  acts  which  are  herein  forbid- 
den shall  include  persons  who  are  participants  in  the  forbidden 
acts,  and  the  agents,  officers,  and  members  of  the  board  of  direc- 
tors or  trustees,  or  other  similar  controlling  bodies  of  corpora- 
tions; (20)  "petition"  shall  mean  a  paper  filed  in  a  court  of  bank- 
ruptcy or  with  a  clerk  or  deputy  clerk  by  a  debtor  praying  for  the 
benefits  of  this  act,  or  by  creditors  alleging  the  commission  of  an 
act  of  bankruptcy  by  a  debtor  therein  named;  (21)  "referee"  shall 
mean  the  referee  who  has  jurisdiction  of  the  case  or  to  whom  the 
case  has  been  referred,  or  anyone  acting  in  his  stead;  (22)  "con- 
ceal" shall  include  secrete,  falsify,  and  mutilate;  (23)  "secured 
creditor"  shall  include  a  creditor  who  has  security  for  his  debt 
upon  the  property  of  the  bankrupt  of  a  nature  to  be  assignable 
under  this  act,  or  who  owns  such  a  debt  for  which  some  indorser, 
surety,  or  other  persons  secondarily  liable  for  the  bankrupt  has 
such  security  upon  the  bankrupt's  assets;  (24)  "States"  shall  in- 
clude the  Territories,  the  Indian  Territory,  Alaska,  and  the  District 
of  Columbia;  (25)  "transfer"  shall  include  the  sale  and  every  other 
and  different  mode  of  disposing  of  or  parting  with  property,  or  the 
possession  of  property,  absolutely  or  conditionally,  as  a  payment, 
pledge,  mortgage,  gift,  or  security;  (26)  "trustee"  shall  include  all 
of  the  trustees  of  an  estate;  (27)  "wage-earner"  shall  mean  an 
individual  who  works  for  wages,  salary,  or  hire,  at  a  rate  of  com- 
pensation not  exceeding  one  thousand  five  hundred  dollars  per 
year;  (28)  words  importing  the  masculine  gender  may  be  applied 
to  and  include  corporations,  partnerships,  and  women;  (29)  words 


2^2. 


APPENDIX 


importing  the  plural  number  may  be  applied  to  and  mean  only  a 
single  person  or  thing;  (30)  words  importing  the  singular  number 
may  be  applied  to  and  mean  several  persons  or  things. 


CHAPTER  II. 

CREATION  OF  COURTS  OF  BANKRUPTCY  AND  THEIR  JURISDICTION. 

§2.  Courts  and  Jurisdiction. — That  tke  courts  of  bankruptcy 
as  hereinbefore  defined,  viz.,  the  district  courts  of  the  United  States 
in  the  several  States,  the  supreme  court  of  the  District  of  Colum- 
bia, the  district  courts  of  the  several  Territories,  and  the  United 
States  courts  in  the  Indian  Territory  and  the  District  of  Alaska, 
are  hereby  made  courts  of  bankruptcy,  and  are  hereby  invested, 
within  their  respective  territorial  limits  as  now  established,  or  as 
they  may  be  hereafter  changed,  with  such  jurisdiction  at  law  and 
in  equity  as  will  enable  them  to  exercise  original  jurisdiction  in 
bankruptcy  proceedings,  in  vacation  in  chambers  and  during  their 
respective  terms,  as  they  are  now  or  may  be  hereafter  held,  to 
(1)  adjudged  persons  bankrupt  who  have  had  their  principal  place 
of  business,  resided,  or  had  their  domicile  within  their  respective 
territorial  jurisdictions  for  the  preceding  six  months,  or  the  greater 
portion  thereof,  or  who  do  not  have  their  principal  place  of  busi- 
ness, reside,  or  have  their  domicile  within  the  United  States,  but 
have  property  within  their  jurisdiction,  or  who  have  been  adjudged 
bankrupts  by  courts  of  competent  jurisdiction  without  the  United 
States  and  have  property  within  their  jurisdiction;  (2)  allow  claims, 
disallow  claims,  reconsider  allowed  or  disallowed  claims  and  allow 
or  disallow  them  against  bankrupt  estates;  (3)  appoint  receivers  or 
the  marshals,  upon  application  of  parties  in  interest,  in  case  the 
courts  shall  find  it  absolutely  necessary,  for  the  preservation  of 
estates,  to  take  charge  of  the  property  of  bankrupts  after  the  filing 
of  the  petition  and  until  it  is  dismissed  or  the  trustee  is  qualified; 
(4)  arraign,  try,  and  punish  bankrupts,  officers,  and  other  persons, 
and  agents,  officers,  members  of  the  board  of  directors  or  trustees,  or 
other  similar  controlling  bodies  of  corporations  for  violations  of  this 
act,  in  accordance  with  the  laws  of  procedure  of  the  United  States 
now  in  force,  or  such  as  may  be  hereafter  enacted,  regulating  trials 
for  the  alleged  violation  of  laws  of  the  United  States;  (5)  authorize 
the  business  of  bankrupts  to  be  conducted  for  limited  periods  by 
receivers,  the  marshals,  or  trustees,  if  necessary  in  the  best  inter- 
ests of  the  estates,  and  allow  such  officers  additional  compensation 
for  such  services,  as  provided  in  section  forty-eight  of  this  act; 
(6)   bring  in  and  substitute  additional  persons  or  parties  in  pro- 


THE    NATIONAL    BANKRUPTCY    ACT 


273 


ceedings  in  bankruptcy  when  necessary  for  the  complete  determi- 
nation of  a  matter  in  controversy;  (7)  cause  the  estates  of  bank- 
rupts to  be  collected,  reduced  to  money  and  distributed,  and  deter- 
mine controversies  in  relation  thereto,  except  as  herein  otherwise 
provided;  (8)  close  estates,  whenever  it  appears  that  they  have 
been  fully  administered,  by  approving  the  final  accounts  and  dis- 
charging the  trustees,  and  reopen  them  whenever  it  appears  they 
were  closed  before  being  fully  administered;  (9)  confirm  or  reject 
compositions  between  debtors  and  their  creditors,  and  set  aside 
compositions  and  reinstate  the  cases;  (10)  consider  and  confirm, 
modify  or  overrule,  or  return,  with  instructions  for  further  pro- 
ceedings, records  and  findings  certified  to  them  by  referees;  (11) 
determine  all  claims  of  bankrupts  to  their  exemptions;  (12)  dis- 
charge or  refuse  to  discharge  bankrupts  and  set  aside  discharges 
and  reinstate  the  cases;  (13)  enforce  obedience  by  bankrupts,  offi- 
cers, and  other  persons  to  all  lawful  orders,  by  fine  or  imprison- 
ment or  fine  and  imprisonment;  (14)  extradite  bankrupts  from 
their  respective  districts  to  other  districts;  (15)  make  such  orders, 
issue  such  process,  and  enter  such  judgments  in  addition  to  those 
specifically  provided  for  as  may  be  necessary  for  the  enforcement 
of  the  provisions  of  this  act;  (16)  punish  persons  for  contempts 
committed  before  referees;  (17)  pursuant  to  the  recommendation 
of  creditors,  or  when  they  neglect  to  recommend  the  appointment 
of  trustees,  appoint  trustees,  and  upon  complaints  of  creditors, 
remove  trustees  for  cause  upon  hearings  and  after  notices  to  them; 
(18)  tax  costs,  whenever  they  are  allowed  by  law,  and  render  judg- 
ments therefor  against  the  unsuccessful  party,  or  the  successful 
party  for  cause,  or  in  part  against  each  of  the  parties,  and  against 
estates,  in  proceedings  in  bankruptcy;  (19)  transfer  cases  to  other 
courts  of  bankruptcy;  and  (20)  exercise  ancillary  jurisdiction  over 
persons  or  property  within  their  respective  territorial  limits  in  aid 
of  a  receiver  or  trustee  appointed  in  any  bankruptcy  proceedings 
pending  in  any  other  court  of  bankruptcy. 

Nothing  in  this  section  contained  shall  be  construed  to  deprive 
a  court  of  bankruptcy  of  any  power  it  would  possess  were  certain 
specific  powers  not  herein  enumerated. 


CHAPTER  III. 


BANKRUPTS. 


§3.  Acts  of  Bankruptcy. — a.  Acts  of  bankruptcy  by  a  person 
shall  consist  of  his  having  (1)  conveyed,  transferred,  concealed,  or 
removed,  or  permitted  to  be  concealed  or  removed,  any  part  of 


274 


APPENDIX 


his  property  with  intent  to  hinder,  delay,  or  defraud  his  creditors, 
or  any  of  them;  or  (2)  transferred,  while  insolvent,  any  portion  of 
his  property  to  one  or  more  of  his  creditors  with  intent  to  prefer 
such  creditors  over  his  other  creditors;  or  (3)  suffered  or  permit- 
ted, while  insolvent,  any  creditor  to  obtain  a  preference  through 
legal  proceedings,  and  not  having  at  least  five  days  before  a  sale 
or  final  disposition  of  any  property  affected  by  such  preference 
vacated  or  discharged  such  preference;  or  (4)  made  a  general  as- 
signment for  the  benefit  of  his  creditors,  or,  being  insolvent, 
applied  for  a  receiver  or  trustee  for  his  property  or  because  of 
insolvency  a  receiver  or  trustee  has  been  put  in  charge  of  his 
property  under  the  laws  of  a  State,  of  a  Territory,  or  of  the  United 
States;  or  (5)  admitted  in  writing  his  inability  to  pay  his  debts  and 
his  willingness  to  be  adjudged  a  bankrupt  on  that  ground. 

b.  A  petition  may  be  filed  against  a  person  who  is  insolvent 
and  who  has  committed  an  act  of  bankruptcy  within  four  months 
after  the  commission  of  such  act.  Such  time  shall  not  expire  until 
four  months  after  (1)  the  date  of  the  recording  or  registering  of 
the  transfer  or  assignment  when  the  act  consists  in  having  made 
a  transfer  of  any  of  his  property  with  intent  to  hinder,  delay,  or 
defraud  his  creditors  or  for  the  purpose  of  giving  a  preference  as 
hereinbefore  provided,  or  a  general  assignment  for  the  benefit  of 
his  creditors,  if  by  law  such  recording  or  registering  is  required  or 
permitted,  or,  if  it  is  not,  from  the  date  when  the  beneficiary  takes 
notorious,  exclusive,  or  continuous  possession  of  the  property 
unless  the  petitioning  creditors  have  received  actual  notice  of  such 
transfer  or  assignment. 

c.  It  shall  be  a  complete  defense  to  any  proceedings  in  bank- 
ruptcy instituted  under  the  first  subdivision  of  this  section  to  allege 
and  prove  that  the  party  proceeded  against  was  not  insolvent  as 
defined  in  this  act  at  the  time  of  the  filing  the  petition  against 
him,  and  if  solvency  at  such  date  is  proved  by  the  alleged  bankrupt 
the  proceedings  shall  be  dismissed,  and  under  said  subdivision  one 
the  burden  of  proving  solvency  shall  be  on  the  alleged  bankrupt. 

d.  Whenever  a  person  against  whom  a  petition  has  been  filed 
as  hereinbefore  provided  under  the  second  and  third  subdivisions 
of  this  section  takes  issue  with  and  denies  the  allegation  of  his 
insolvency,  it  shall  be  his  duty  to  appear  in  court  on  the  hearing, 
with  his  books,  papers,  and  accounts,  and  submit  to  an  examina- 
tion, and  give  testimony  as  to  all  matters  tending  to  establish  sol- 
vency or  insolvency,  and  in  case  of  his  failure  to  so  attend  and 
submit  to  examination  the  burden  of  proving  his  solvency  shall 
rest  upon  him. 

e.    Whenever  a  petition  is  filed  by  any  person  for  the  purpose 


THE    NATIONAL    BANKRUPTCY    ACT  275 

of  having  another  adjudged  a  bankrupt,  and  an  application  is  made 
to  take  charge  of  and  hold  the  property  of  the  alleged  bankrupt, 
or  any  part  of  the  same  prior  to  the  adjudication  and  pending  a 
hearing  on  the  petition,  the  petitioner  or  applicant  shall  file  in  the 
same  court  a  bond  with  at  least  two  good  and  sufficient  sureties 
who  shall  reside  within  the  jurisdiction  of  said  court,  to  be  ap- 
proved by  the  court  or  a  judge  thereof,  in  such  sum  as  the  court 
shall  direct,  conditioned  for  the  payment,  in  case  such  petition  is 
dismissed,  to  the  respondent,  his  or  her  personal  representatives, 
of  all  costs,  expenses  and  damages  occasioned  by  such  seizure,  tak- 
ing, and  detention  of  the  property  of  the  alleged  bankrupt. 

If  such  petition  be  dismissed  by  the  court  or  withdrawn  by 
the  petitioner,  the  respondent  or  respondents  shall  be  allowed  all 
costs,  counsel  fees,  expenses,  and  damages  occasioned  by  such 
seizure,  taking,  or  detention  of  such  property.  Counsel  fees,  costs, 
expenses,  and  damages  shall  be  fixed  and  allowed  by  the  court, 
and  paid  by  the  obligors  in  such  bond. 

§4.  Who  May  Become  Bankrupts. — a.  Any  person,  except 
a  municipal,  railroad,  insurance  or  banking  corporation,  shall  be 
entitled  to  the  benefits  of  this  act  as  a  voluntary  bankrupt. 

b.  Any  natural  person,  except  a  wage-earner  or  a  person  en- 
gaged chiefly  in  farming  or  the  tillage  of  the  soil;  any  un- 
incorporated company,  and  any  moneyed  business  or  commercial 
corporation,  except  a  municipal,  railroad,  insurance,  or  banking 
corporation,  owing  debts  to  the  amount  of  one  thousand  dollars 
or  over,  may  be  adjudged  an  involuntary  bankrupt  upon  default 
or  an  impartial  trial,  and  shall  be  subject  to  the  provisions  and 
entitled  to  the  benefits  of  this  act.  The  bankruptcy  of  a  corpora- 
tion shall  not  release  its  officers,  directors,  or  stockholders,  as 
such,  from  any  liability  under  the  laws  of  a  State  or  Territory  or 
of  the  United  States. 

§  5.  Partners. — a.  A  partnership  during  the  continuation  of  the 
partnership  business,  or  after  its  dissolution  and  before  the  final 
settlement  thereof,  may  be  adjudged  a  bankrupt. 

b.  The  creditors  of  the  partnership  shall  appoint  the  trustee; 
in  other  respects  so  far  as  possible  the  estate  shall  be  adminis- 
tered as  herein  provided  for  other  estates. 

c.  The  court  of  bankruptcy  which  has  jurisdiction  of  one  of 
the  partners  may  have  jurisdiction  of  all  the  partners  and  of  the 
administration  of  the  partnership  and  Individual  property. 

d.  The  trustee  shall  keep  separate  accounts  of  the  partnership 
property  and  of  the  property  belonging  to  the  individual  partners. 


276  APPENDIX 

e.  The  expenses  shall  be  paid  from  the  partnership  property 
and  the  individual  property  in  such  proportions  as  the  court  shall 
determine. 

/.  The  net  proceeds  of  the  partnership  property  shall  be  ap- 
propriated to  the  payment  of  the  partnership  debts,  and  the  net 
proceeds  of  the  individual  estate  of  each  partner  to  the  payment 
of  his  individual  debts.  Should  any  surplus  remain  of  the  property 
of  any  partner  after  paying  his  individual  debts,  such  surplus  shall 
be  added  to  the  partnership  assets  and  be  applied  to  the  payment 
of  the  partnership  debts.  Should  any  surplus  of  the  partnership 
property  remain  after  paying  the  partnership  debts,  such  surplus 
shall  be  added  to  the  assets  of  the  individual  partners  in  the  pro- 
portion of  their  respective  interests  in  the  partnership. 

g.  The  court  may  permit  the  proof  of  the  claim  of  the  part- 
nership estate  against  the  individual  estates,  and  vice  versa,  and 
may  marshal  the  assets  of  the  partnership  estate  and  individual 
estates  so  as  to  prevent  preferences  and  secure  the  equitable  dis- 
tribution of  the  property  of  the  several  estates. 

h.  In  the  event  of  one  or  more  but  not  all  of  the  members 
of  a  partnership  being  adjudged  bankrupt,  the  partnership  property 
shall  not  be  administered  in  bankruptcy,  unless  by  consent  of  the 
partner  or  partners  not  adjudged  bankrupt;  but  such  partner  or 
partners  not  adjudged  bankrupt  shall  settle  the  partnership  busi- 
ness as  expeditiously  as  its  nature  will  permit  and  account  for 
the  interest  of  the  partner  or  partners  adjudged  bankrupt. 

§  6.  Exemptions  of  Bankrupts. — a.  This  act  shall  not  affect 
the  allowance  to  bankrupts  of  the  exemptions  which  are  prescribed 
by  the  State  laws  in  force  at  the  time  of  the  filing  of  the  petition 
in  the  State  wherein  they  have  had  their  domicile  for  the  six 
months  or  the  greater  portion  thereof  immediately  preceding  the 
filing  of  the  petition. 

§  7.  Duties  of  Bankrupts. — a.  The  bankrupt  shall  (1)  attend 
the  first  meeting  of  his  creditors  if  directed  by  the  court  or  a 
judge  thereof  to  do  so,  and  the  hearing  upon  his  application  for 
a  discharge,  if  filed;  (2)  comply  with  all  lawful  orders  of  the 
court;  (3)  examine  the  correctness  of  all  proofs  of  claims  filed 
against  his  estate;  (4)  execute  and  deliver  such  papers  as  shall 
be  ordered  by  the  court;  (5)  execute  to  his  trustee  transfers  of 
all  his  property  in  foreign  countries;  (6)  immediately  inform  his 
trustee  of  any  attempt,  by  his  creditors  or  other  persons,  to  evade 
the  provisions  of  this  act,  coming  to  his  knowledge;  (7)  in  case 
of   any    person    having   to    his    knowledge   proved    a   false    claim 


.    THE    NATIONAL    BANKRUPTCY    ACT  277 

against  his  estate,  disclose  that  fact  immediately  to  his  trustee; 
(8)  prepare,  make  oath  to,  and  file  in  court  within  ten  days,  unless 
further  time  is  granted,  after  the  adjudication,  if  an  involuntary 
bankrupt,  and  with  the  petition  if  a  voluntary  bankrupt,  a  schedule 
of  his  property,  showing  the  amount  and  kind  of  property,  the 
location  thereof,  its  money  value  in  detail,  and  a  list  of  his 
creditors  showing  their  residences,  if  known,  if  unknown,  that 
fact  to  be  stated,  the  amounts  due  each  of  them,  the  consideration 
thereof,  the  security  held  by  them,  if  any,  and  a  claim  for  such 
exemptions  as  he  may  be  entitled  to,  all  in  triplicate,  one  copy  of 
each  for  the  clerk,  one  for  the  referee,  and  one  for  the  trustee; 
and  (9)  when  present  at  the  first  meeting  of  his  creditors,  and 
at  such  other  times  as  the  court  shall  order,  submit  to  an  exam- 
ination concerning  the  conducting  of  his  business,  the  cause  of 
his  bankruptcy,  his  dealings  with  his  creditors  and  other  persons, 
the  amount,  kind,  and  whereabouts  of  his  property,  and  in  ad- 
dition, all  matters  which  may  affect  the  administration  and  settle- 
ment of  his  estate;  but  no  testimony  given  by  him  shall  be  offered 
in  evidence  against  him  in  any  criminal  proceeding. 

Provided,  however,  That  he  shall  not  be  required  to  attend  a 
meeting  of  his  creditors,  or  at  or  for  an  examination  at  a  place 
more  than  one  hundred  and  fifty  miles  distant  from  his  home  or 
principal  place  of  business,  or  to  examine  claims  except  when  pre- 
sented to  him,  unless  ordered  by  the  court,  or  a  judge  thereof,  for 
cause  shown,  and  the  bankrupt  shall  be  paid  his  actual  expenses 
from  the  estate  when  examined  or  required  to  attend  at  any  place 
other  than  the  city,  town,  or  village  of  his  residence. 

§  8.  Death  or  Insanity  of  Bankrupts. — a.  The  death  or  insan- 
ity of  a  bankrupt  shall  not  abate  the  proceedings,  but  the  same 
shall  be  conducted  and  concluded  in  the  same  manner,  so  far  as 
possible,  as  though  he  had  not  died  or  become  insane:  Provided, 
That  in  case  of  death  the  widow  and  children  shall  be  entitled  to 
all  rights  of  dower  and  allowance  fixed  by  the  laws  of  the  State  of 
the  bankrupt's  residence. 

§  9.  Protection  and  Detention  of  Bankrupts. — a.  A  bankrupt 
shall  be  exempt  from  arrest  upon  civil  process  except  in  the  fol- 
lowing cases:  (1)  When  issued  from  a  court  of  bankruptcy  for 
contempt  or  disobedience  of  its  lawful  orders;  (2)  when  issued 
from  a  State  court  having  jurisdiction,  and  served  within  such 
State,  upon  a  debt  or  claim  from  which  his  discharge  in  bankruptcy 
would  not  be  a  release,  and  in  such  case  he  shall  be  exempt  from 


278 


APPENDIX 


such   arrest   when   in   attendance   upon   a   court   of   bankruptcy    or 
engaged  in  the  performance  of  a  duty  imposed  by  this  act. 

b.  The  judge  may,  at  any  time  after  the  filing  of  a  petition  by 
or  against  a  person,  and  before  the  expiration  of  one  month  after 
the  qualification  of  the  trustee,  upon  satisfactory  proof  by  the  affi- 
davits of  at  least  two  persons  that  such  bankrupt  is  about  to  leave 
the  district  in  which  he  resides  or  has  his  principal  place  of  busi- 
ness to  avoid  examination,  and  that  his  departure  will  defeat  the 
proceedings  in  bankruptcy,  issue  a  warrant  to  the  marshal  directing 
him  to  bring  such  bankrupt  forthwith  before  the  court  for  exami- 
nation. If  upon  hearing  the  evidence  of  the  parties  it  shall  appear 
to  the  court  or  a  judge  thereof  that  the  allegations  are  true  and 
that  it  is  necessary,  he  shall  order  such  marshal  to  keep  such  bank- 
rupt in  custody  not  exceeding  ten  days,  but  not  imprison  him,  until 
he  shall  be  examined  and  released  or  give  bail  conditioned  for  his 
appearance  for  examination,  from  time  to  time,  not  exceeding  in 
all  ten  days,  as  required  by  the  court,  and  for  his  obedience  to  all 
lawful  orders  made  in  reference  thereto. 

§  10.  Extradition  of  Bankrupts. — a.  Whenever  a  warrant  for 
the  apprehension  of  a  bankrupt  shall  have  been  issued,  and  he  shall 
have  been  found  within  the  jurisdiction  of  a  court  other  than  the 
one  issuing  the  warrant,  he  may  be  extradited  in  the  same  manner 
in  which  persons  under  indictment  are  now  extradited  from  one 
district  within  which  a  district  court  has  jurisdiction  to  another. 

§11.  Suits  by  and  against  Bankrupts. — a.  A  suit  which  is 
founded  upon  a  claim  from  which  a  discharge  would  be  a  release, 
and  which  is  pending  against  a  person  at  the  time  of  a  filing  of  a 
petition  against  him,  shall  be  stayed  until  after  an  adjudication  or 
the  dismissal  of  the  petition;  if  such  person  is  adjudged  a  bankrupt, 
such  action  may  be  further  stayed  until  twelve  months  after  the 
date  of  such  adjudication,  or,  if  within  that  time  such  person 
applies  for  a  discharge,  then  until  the  question  of  such  discharge  is 
determined. 

b.  The  court  may  order  the  trustee  to  enter  his  appearance 
and  defend  any  pending  suit  against  the  bankrupt. 

c.  A  trustee  may,  with  the  approval  of  the  court,  be  permitted 
to  prosecute  as  trustee  any  suit  commenced  by  the  bankrupt  prior 
to  the  adjudication,  with  like  force  and  effect  as  though  it  had  been 
commenced  by  him. 

d.  Suits  shall  not  be  brought  by  or  against  a  trustee  of  a 
bankrupt  estate  subsequent  to  two  years  after  the  estate  has  been 
closed. 


THE    NATIONAL    BANKRUPTCY    ACT 


279 


§  12.  Compositions,  when  Confirmed. — a.  A  bankrupt  may 
offer  either  before  or  after  adjudication,  terms  of  composition  to 
his  creditors  after,  but  not  before,  he  has  been  examined  in  open 
court  or  at  a  meeting  of  his  creditors,  and  has  filed  in  court  the 
schedule  of  his  property  and  the  list  of  his  creditors  required  to  be 
filed  by  bankrupts.  In  compositions  before  adjudication  the  bank- 
rupt shall  file  the  required  schedules,  and  thereupon  the  court  shall 
call  a  meeting  of  creditors  for  the  allowance  of  claims,  examina- 
tion of  the  bankrupt,  and  preservation  or  conduct  of  estates,  at 
which  meeting  the  judge  or  referee  shall  preside;  and  action  upon 
the  petition  for  adjudication  shall  be  delayed  until  it  shall  be  deter- 
mined whether  such  composition  shall  be  confirmed. 

b.  An  application  for  the  confirmation  of  a  composition  may 
be  filed  in  the  court  of  bankruptcy  after,  but  not  before,  it  has  been 
accepted  in  writing  by  a  majority  in  number  of  all  creditors  whose 
claims  have  been  allowed,  which  number  must  represent  a  major- 
ity in  amount  of  such  claims,  and  the  consideration  to  be  paid  by 
the  bankrupt  to  his  creditors,  and  the  money  necessary  to  pay  all 
debts  which  have  priority  and  the  cost  of  the  proceedings,  have 
been  deposited  in  such  place  as  shall  be  designated  by  and  subject 
to  the  order  of  the  judge. 

c.  A  date  and  place,  with  reference  to  the  convenience  of  the 
parties  in  interest,  shall  be  fixed  for  the  hearing  upon  each  appli- 
cation for  the  confirmation  of  a  composition,  and  such  objections 
as  may  be  made  to  its  confirmation. 

d.  The  judge  shall  confirm  a  composition  if  satisfied  that  (1) 
it  is  for  the  best  interests  of  the  creditors;  (2)  the  bankrupt  has  not 
been  guilty  of  any  of  the  acts  or  failed  to  perform  any  of  the  duties 
which  would  be  a  bar  to  his  discharge;  and  (3)  the  offer  and  its 
acceptance  are  in  good  faith  and  have  not  been  made  or  procured 
except  as  herein  provided,  or  by  any  means,  promises,  or  acts 
herein  forbidden. 

e.  Upon  the  confirmation  of  a  composition,  the  consideration 
shall  be  distributed  as  the  judge  shall  direct,  and  the  case  dis- 
missed. Whenever  a  composition  is  not  confirmed,  the  estate  shall 
be  administered  in  bankruptcy  as  herein  provided. 

§  13.  Compositions,  when  set  aside. — a.  The  judge  may,  upon 
the  application  of  parties  in  interest  filed  at  any  time  within  six 
months  after  a  composition  has  been  confirmed,  set  the  same  aside 
and  reinstate  the  case  if  it  shall  be  made  to  appear  upon  a  trial 
that  fraud  was  practiced  in  the  procuring  of  such  composition,  and 
that  the  knowledge  thereof  has  come  to  the  petitioners  since  the 
confirmation  of  such  composition. 


28o  APPENDIX 

§  14.  Discharges,  when  Granted. — a.  Any  person  may,  after 
the  expiration  of  one  month  and  within  the  next  twelve  months 
subsequent  to  being  adjudged  a  bankrupt,  file  an  application  for  a 
discharge  in  the  court  of  bankruptcy  in  which  the  proceedings  are 
pending;  if  it  shall  be  made  to  appear  to  the  judge  that  the  bank- 
rupt was  unavoidably  prevented  from  filing  it  within  such  time,  it 
may  be  filed  within  but  not  after  the  expiration  of  the  next  six 
months. 

b.  The  judge  shall  hear  application  for  a  discharge  and  such 
proofs  and  pleas  as  may  be  made  in  opposition  thereto  by  the 
trustee  or  other  parties  in  interest,  at  such  time  as  will  give  the 
trustee  or  parties  in  interest  a  reasonable  opportunity  to  be  heard, 
and  investigate  the  merits  of  the  application  and  discharge  the 
applicant  unless  he  has  (1)  committed  an  offense  punishable  by 
imprisonment  as  herein  provided;  or  (2)  with  intent  to  conceal  his 
financial  condition,  destroyed,  concealed,  or  failed  to  keep  books  of 
account  or  records  from  which  such  condition  might  be  ascer- 
tained; or  (3)  obtained  money  or  property  on  credit  upon  a  materi- 
ally false  statement  in  writing,  made  by  him  to  any  person  or  his 
representative  for  the  purpose  of  obtaining  credit  from  such  per- 
son; or  (4)  at  any  time  subsequent  to  the  first  day  of  the  four 
months  immediately  preceding  the  filing  of  the  petition  transferred, 
removed,  destroyed,  or  concealed,  or  permitted  to  be  removed,  de- 
stroyed, or  concealed,  any  of  his  property,  with  intent  to  hinder, 
delay,  or  defraud  his  creditors;  or  (5)  in  voluntary  proceedings  been 
granted  a  discharge  in  bankruptcy  within  six  years;  or  (6)  in  the 
course  of  the  proceedings  in  bankruptcy  refused  to  obey  any  lawful 
order  of,  or  to  answer  any  material  question  approved  by  the 
court:  Provided,  That  a  trustee  shall  not  interpose  objections  to  a 
bankrupt's  discharge  until  he  shall  be  authorized  so  to  do  at  a 
meeting  of  creditors  called  for  that  purpose. 

c.  The  confirmation  of  a  composition  shall  discharge  the 
bankrupt  from  his  debts,  other  than  those  agreed  to  be  paid  by  the 
terms  of  the  composition  and  those  not  affected  by  a  discharge. 

§  15.  Discharges,  when  Revoked. — a.  The  judge  may,  upon 
the  application  of  parties  in  interest  who  have  not  been  guilty  of 
undue  laches,  filed  at  any  time  within  one  year  after  a  discharge 
shall  have  been  granted,  revoke  it  upon  a  trial  if  it  shall  be  made 
to  appear  that  it  was  obtained  through  the  fraud  of  the  bankrupt, 
and  that  the  knowledge  of  the  fraud  has  come  to  the  petitioners 
since  the  granting  of  the  discharge,  and  that  the  actual  facts  did 
not  warrant  the  discharge. 


THE    NATIONAL    BANKRUPTCY    ACT  281 

§  16.  Co-Debtors  of  Bankrupts.— a.  The  liability  of  a  person 
who  is  a  co-debtor  with,  or  guarantor  or  in  any  manner  a  surety 
for,  a  bankrupt  shall  not  be  altered  by  the  discharge  of  such 
bankrupt. 

§  17.  Debts  not  Affected  by  a  Discharge.— a.  A  discharge  in 
bankruptcy  shall  release  a  bankrupt  from  all  of  his  provable  debts, 
except  such  as  (1)  are  due  as  a  tax  levied  by  the  United  States,  the 
State,  county,  district,  or  municipality  in  which  he  resides;  (2)  are 
liabilities  for  obtaining  property  by  false  pretenses  or  false  repre- 
sentations, or  for  willful  and  malicious  injuries  to  the  person  or 
property  of  another,  or  for  alimony  due  or  to  become  due,  or  for 
maintenance  or  support  of  wife  or  child,  or  for  seduction  of  an 
unmarried  female,  or  for  criminal  conversation;  (3)  have  not  been 
duly  scheduled  in  time  for  proof  and  allowance,  with  the  name  of 
the  creditor  if  known  to  the  bankrupt,  unless  such  creditor  had 
notice  or  actual  knowledge  of  the  proceedings  in  bankruptcy;  or 
(4)  were  created  by  his  fraud,  embezzlement,  misappropriation,  or 
defalcation  while  acting  as  an  officer  or  in  any  fiduciary  capacity. 


CHAPTER  IV. 


COURTS   AND   PROCEDURE  THEREIN. 


§  18.  Process,  Pleadings,  and  Adjudications. — a.  Upon  the 
filing  of  a  petition  for  involuntary  bankruptcy  service  thereof,  with 
a  writ  of  subpoena,  shall  be  made  upon  the  person  therein  named 
as  defendant  in  the  same  manner  that  service  of  such  process  is 
now  had  upon  the  commencement  of  a  suit  in  equity  in  the  courts 
of  the  United  States,  except  that  it  shall  be  returnable  within 
fifteen  days,  unless  the  judge  shall  for  cause  fix  a  longer  time;  but 
in  case  personal  service  cannot  be  made,  then  notice  shall  be  given 
by  publication  in  the  same  manner  and  for  the  same  time  as  pro- 
vided by  law  for  notice  by  publication  in  suits  to  enforce  a  legal 
or  equitable  lien,  in  courts  of  the  United  States,  except  that,  unless 
the  judge  shall  otherwise  direct,  the  order  shall  be  published  not 
more  than  once  a  week  for  two  consecutive  weeks,  and  the  return 
day  shall  be  ten  days  after  the  last  publication  unless  the  judge 
shall  for  cause  fix  a  longer  time. 

h.  The  bankrupt,  or  any  creditor,  may  appear  and  plead  to  the 
petition  within  five  days  after  the  return  day,  or  within  such  fur- 
ther time  as  the  court  may  allow. 

c.  All  pleadings  setting  up  matters  of  fact  shall  be  verified 
under  oath. 


282  APPENDIX 

d.  If  the  bankrupt,  or  any  of  his  creditors,  shall  appear, 
within  the  time  limited,  and  controvert  the  facts  alleged  in  the 
petition,  the  judge  shall  determine,  as  soon  as  may  be,  the  issues 
presented  by  the  pleadings,  without  the  intervention  of  a  jury, 
except  in  cases  where  a  jury  trial  is  given  by  this  act,  and  make 
the  adjudication  or  dismiss  the  petition.. 

e.  If  on  the  last  day  within  which  pleadings  may  be  filed  none 
are  filed  by  the  bankrupt  or  any  of  his  creditors,  the  judge  shall 
on  the  next  day,  if  present,  or  as  soon  thereafter  as  practicable, 
make  the  adjudication  or  dismiss  the  petition. 

/.  If  the  judge  is  absent  from  the  district,  or  the  division  of 
the  district  in  which  the  petition  is  pending,  on  the  next  day  after 
the  last  day  on  which  pleadings  may  be  filed,  and  none  have  been 
filed  by  the  bankrupt  or  any  of  his  creditors,  the  clerk  shall  forth- 
with refer  the  case  to  the  referee. 

g.  Upon  the  filing  of  a  voluntary  petition  the  judge  shall  hear 
the  petition  and  make  the  adjudication  or  dismiss  the  petition.  If 
the  judge  is  absent  from  the  district,  or  the  division  of  the  district 
in  which  the  petition  is  filed  at  the  time  of  the  filing,  the  clerk 
shall  forthwith  refer  the  case  to  the  referee. 

§  19.  Jury  Trials. — a.  A  person  against  whom  an  involuntary 
petition  has  been  filed  shall  be  entitled  to  have  a  trial  by  jury  in 
respect  to  the  question  of  his  insolvency,  except  as  herein  other- 
wise provided,  and  any  act  of  bankruptcy  alleged  in  such  petition 
to  have  been  committed,  upon  filing  a  written  application  therefor 
at  or  before  the  time  within  which  an  answer  may  be  filed.  If 
such  application  is  not  filed  within  such  time,  a  trial  by  jury  shall 
be  deemed  to  have  been  waived. 

b.  If  a  jury  is  not  in  attendance  upon  the  court,  one  may  be 
specially  summoned  for  the  trial,  or  the  case  may  be  postponed,  or, 
if  the  case  is  pending  in  one  of  the  district  courts  within  the  juris- 
diction of  a  circuit  court  of  the  United  States,  it  may  be  certified 
for  trial  to  the  circuit  court  sitting  at  the  same  place,  or  by  consent 
of  parties  when  sitting  at  any  other  place  in  the  same  district,  if 
such  circuit  court  has  or  is  to  have  a  jury  first  in  attendance. 

c.  The  right  to  submit  matters  in  controversy,  or  an  alleged 
offense  under  this  act,  to  a  jury  shall  be  determined  and  enjoyed, 
except  as  provided  by  this  act,  according  to  the  United  States  laws 
now  in  force  or  such  as  may  be  hereafter  enacted  in  relation  to 
trials  by  jury. 

§  20.  Oaths,  Affirmations. — a.  Oaths  required  by  this  act, 
except  upon  hearings  in  court,  may  be  administered   by   (1)   ref- 


THE    NATIONAL    BANKRUPTCY    ACT  283 

crces;  (2)  officers  authorized  to  administer  oaths  in  proceedings 
before  the  courts  of  the  United  States,  or  under  the  laws  of  the 
State  where  the  same  are  to  be  taken;  and  (3)  diplomatic  or  con- 
sular officers  of  the  United  States  in  any  foreign  country. 

h.  Any  person  conscientiously  opposed  to  taking  an  oath  may, 
in  lieu  thereof,  affirm.  Any  person  who  shall  affirm  falsely  shall  be 
punished  as  for  the  making  of  a  false  oath. 

§21.  Evidence. — a.  A  court  of  bankruptcy  may,  upon  appli- 
cation of  any  officer,  bankrupt,  or  creditor,  by  order  require  any 
designated  person,  including  the  bankrupt  and  his  wife,  to  appear 
in  court  or  before  a  referee  or  the  judge  of  any  State  court,  to  be 
examined  concerning  the  acts,  conduct,  or  property  of  a  bankrupt 
whose  estate  is  in  process  of  administration  under  this  act:  Pro- 
vided, That  the  wife  may  be  examined  only  touching  business 
transacted  by  her  or  to  which  she  is  a  party,  and  to  determine  the 
fact  whether  she  has  transacted  or  been  a  party  to  any  business  of 
the  bankrupt. 

h.  The  right  to  take  depositions  in  proceedings  under  this  act 
shall  be  determined  and  enjoyed  according  to  the  United  States 
laws  now  in  force,  or  such  as  may  be  hereafter  enacted  relating  to 
the  taking  of  depositions,  except  as  herein  provided. 

c.  Notice  of  the  taking  of  depositions  shall  be  filed  with  the 
referee  in  every  case.  When  depositions  are  to  be  taken  in  opposi- 
tion to  the  allowance  of  a  claim  notice  shall  also  be  served  upon 
the  claimant,  and  when  in  opposition  to  a  discharge  notice  shall  also 
be  served  upon  the  bankrupt. 

d.  Certified  copies  of  proceedings  before  a  referee,  or  of 
papers,  when  issued  by  the  clerk  or  referee,  shall  be  admitted  as 
evidence  with  like  force  and  effect  as  certified  copies  of  the  records 
of  district  courts  of  the  United  States  are  now  or  may  hereafter 
be  admitted  as  evidence. 

e.  A  certified  copy  of  the  order  approving  the  bond  of  a 
trustee  shall  constitute  conclusive  evidence  of  the  vesting  in  him  of 
the  title  to  the  property  of  the  bankrupt,  and  if  recorded  shall  im- 
part the  same  notice  that  a  deed  from  the  bankrupt  to  the  trustee 
if  recorded  would  have  imparted  had  not  bankruptcy  proceedings 
intervened. 

/.  A  certified  copy  qf  an  order  confirming  or  setting  aside  a 
composition,  or  granting  or  setting  aside  a  discharge,  not  revoked 
shall  be  evidence  of  the  jurisdiction  of  the  court,  the  regularity  of 
the  proceedings,  and  of  the  fact  that  the  order  was  made. 

g.  A  certified  copy  of  an  order  confirming  a  composition  shall 
constitute  evidence  of  the  revesting  of  the  title  of  his  property  in 


284  APPENDIX 

the  bankrupt,  and  if  recorded  shall  impart  the  same  notice  that  a 
deed  from  the  trustee  to  the  bankrupt  if  recorded  would  impart. 

§  22.  Reference  of  Cases  after  Adjudication. — a.  After  a  person 
has  been  adjudged  a  bankrupt  the  judge  may  cause  the  trustee  to 
proceed  with  the  administration  of  the  estate,  or  refer  it  (1)  gen- 
erally to  the  referee  or  specially  with  only  limited  authority  to 
act  in  the  premises  or  to  consider  and  report  upon  specified  issues; 
or  (2)  to  any  referee  within  the  territorial  jurisdiction  of  the  court, 
if  the  convenience  of  parties  in  interest  will  be  served  thereby,  or 
for  cause,  or  if  the  bankrupt  does  not  do  business,  reside,  or  have 
his  domicile  in  the  district. 

b.  The  judge  may,  at  any  time,  for  the  convenience  of  parties 
or  for  cause,  transfer  a  case  from  one  referee  to  another. 

§23.     Jurisdiction  of  United  States  and  State  Courts.— a.   The 

United  States  circuit  courts  shall  have  jurisdiction  of  all  contro- 
versies at  law  and  in  equity,  as  distinguished  from  proceedings  in 
bankruptcy,  between  trustees  as  such  and  adverse  claimants  con- 
cerning the  property  acquired  or  claimed  by  the  trustees,  in  the 
same  manner  and  to  the  same  extent  only  as  though  bankruptcy 
proceedings  had  not  been  instituted  and  such  controversies,  had 
been  between  the  bankrupts  and  such  adverse  claimants. 

b.  Suits  by  the  trustee  shall  only  be  brought  or  prosecuted 
in  the  courts  where  the  bankrupt,  whose  estate  is  being  administered 
by  such  trustee,  might  have  brought  or  prosecuted  them  if  pro- 
ceedings in  bankruptcy  had  not  been  instituted,  unless  by  consent 
of  the  proposed  defendant,  except  suits  for  the  recovery  of  property 
under  section  sixty,  subdivision  b;  section  sixty-seven,  subdivision 
e;  and  section  seventy,  subdivision  e. 

c.  The  United  States  circuit  courts  shall  have  concurrent  juris- 
diction with  the  courts  of  bankruptcy,  within  their  respective 
territorial  limits,  of  the  offenses  enumerated  in  this  act. 

§  24.  Jurisdiction  of  Appellate  Courts. — a.  The  Supreme  Court 
of  the  United  States,  the  circuit  courts  of  appeals  of  the  United 
States,  and  the  supreme  courts  of  the  Territories,  in  vacation  in 
chambers  and  during  their  respective  terms,  as  now  or  as  they  may 
be  hereafter  held,  are  hereby  invested  with  appellate  jurisdiction  of 
controversies  arising  in  bankruptcy  proceedings  from  the  courts  of 
bankruptcy  from  which  they  have  appellate  jurisdiction  in  other 
cases.  The  Supreme  Court  of  the  United  States  shall  exercise  a 
like  jurisdiction  from  courts  of  bankruptcy  not  within  any  organized 


THE    NATIONAL    BANKRUPTCY    ACT 


285 


circuit  of  the  United   States  and  from  the  supreme   court  of  the 
District  of  Columbia. 

b.  The  several  circuit  courts  of  appeal  shall  have  jurisdiction  in 
equity,  either  interlocutory  or  final,  to  superintend  and  revise  in 
matter  of  law  the  proceedings  of  the  several  inferior  courts  of  bank- 
ruptcy within  their  jurisdiction.  Such  power  shall  be  exercised  on 
due  notice  and   petition  by  any  party  aggrieved. 

§25.  Appeals  and  Writs  of  Error. — a.  That  appeals,  as  in 
equity  cases,  may  be  taken  in  bankruptcy  proceedings  from  the 
courts  of  bankruptcy  to  the  circuit  court  of  appeals  of  the  United 
States,  and  to  the  supreme  courts  of  Territories,  in  the  following 
cases,  to  wit,  (1)  from  a  judgment  adjudging  or  refusing  to  adjudge 
the  defendant  a  bankrupt;  (2)  from  a  judgment  granting  or  denying 
a  discharge;  and  (3)  from  a  judgment  allowing  or  rejecting  a  debt 
or  claim  of  five  hundred  dollars  or  over.  Such  appeal  shall  be 
taken  within  ten  days  after  the  judgment  appealed  from  has  been 
rendered,  and  may  be  heard  and  determined  by  the  appellate  court 
in  term  or  vacation,  as  the  case  may  be. 

b.  From  any  final  decision  of  a  court  of  appeals,  allowing  or 
rejecting  a  claim  under  this  act,  an  appeal  may  be  had  under  such 
rules  and  within  such  time  as  may  be  prescribed  by  the  Supreme 
Court  of  the  United  States,  in  the  following  cases  and  no  other: 

1.  Where  the  amount  in  controversy  exceeds  the  sum  of  two 
thousand  dollars,  and  the  question  involved  is  one  which  might 
have  been  taken  on  appeal  or  writ  of  error  from  the  highest  courts 
of  a  State  to  the  Supreme  Court  of  the  United  States;  or 

2.  Where  some  Justice  of  the  Supreme  Court  of  the  United 
States  shall  certify  that  in  his  opinion  the  determination  of  the 
question  or  questions  involved  in  the  allowance  or  rejection  of  such 
claim  is  essential  to  a  uniform  construction  of  this  act  throughout 
the  United  States. 

c.  Trustees  shall  not  be  required  to  give  bonds  when  they  take 
appeals  or  sue  out  writs  of  error. 

d.  Controversies  may  be  certified  to  the  Supreme  Court  of  the 
United  States  from  other  courts  of  the  United  States,  and  the 
former  court  may  exercise  jurisdiction  thereof  and  issue  writs  of 
certiorari  pursuant  to  the  provisions  of  the  United  States  laws  now 
in  force  or  such  as  may  be  hereafter  enacted. 

§  26.  Arbitration  of  Controversies. — a.  The  trustee  may, 
pursuant  to  the  direction  of  the'  court,  submit  to  arbitration  any 
controversy  arising  in  the  settlement  of  the  estate. 

b.    Three  arbitrators  shall  be  chosen  by  mutual  consent,  or  one 


286  APPENDIX 

by  the  trustee;  one  by  the  other  party  to  the  controversy,  and  the 
third  by  the  two  so  chosen,  or  if  they  fail  to  agree  in  five  days 
after  their  appointment  the  court  shall  appoint  the  third  arbitrator. 
c.  The  written  finding  of  the  arbitrators,  or  a  majority  of 
them,  as  to  the  issues  presented,  may  be  filed  in  court  and  shall 
have  like  force  and  effect  as  the  verdict  of  a  jury. 

§  27.  Compromises. — a.  The  trustee  may,  with  the  approval 
of  the  court,  compromise  any  controversy  arising  in  the  administra- 
tion of  the  estate  upon  such  terms  as  he  may  deem  for  the  best 
interest  of  the  estate. 

§28.  Designation  of  Newspapers. — a.  Courts  of  bankruptcy 
shall  by  order  designate  a  newspaper  published  within  their  re- 
spective territorial  districts,  and  in  the  county  in  which  the  bank- 
rupt resides  or  the  major  part  of  his  property  is  situated,  in  which 
notices  required  to  be  published  by  this  act  and  orders  which  the 
court  may  direct  to  be  published  shall  be  inserted.  Any  court  may 
in  a  particular  case,  for  the  convenience  of  parties  in  interest, 
designate  some  additional  newspaper  in  which  notices  and  orders  in 
such  case  shall  be  published. 

§29.  Offenses. — a.  A  person  shall  be  punished,  by  imprison- 
ment for  a  period  not  to  exceed  five  years,  upon  conviction  of  the 
offense  of  having  knowingly  and  fraudulently  appropriated  to  his 
own  use,  embezzled,  spent,  or  unlawfully  transferred  any  property 
or  secreted  or  destroyed  any  document  belonging  to  a  bankrupt 
estate  which  came  into  his  charge  as  trustee. 

h.  A  person  shall  be  punished,  by  imprisonment  for  a  period 
not  to  exceed  two  years,  upon  conviction  of  the  offense  of  having 
knowingly  and  fraudulently  (1)  concealed  while  a  bankrupt,  or 
after  his  discharge,  from  his  trustee  any  of  the  property  belonging 
to  his  estate  in  bankruptcy;  or  (2)  made  a  false  oath  or  account 
in,  or  in  relation  to,  any  proceeding  in  bankruptcy;  (3)  presented 
under  oath  any  false  claim  for  proof  against  the  estate  of  a  bank- 
rupt, or  used  any  such  claim  in  composition  personally  or  by  agent, 
proxy,  or  attorney,  or  as  agent,  proxy,  or  attorney;  or  (4)  received 
any  material  amount  of  property  from  a  bankrupt  after  the  filing  of 
the  petition,  with  intent  to  defeat  this  act;  or  (5)  extorted  or  at- 
tempted to  extort  any  money  or  property  from  any  person  as  a 
consideration  for  acting  or  forbearing  to  act  in  bankruptcy  pro- 
ceedings. 

c.  A  person  shall  be  punished  by  fine,  not  to  exceed  five  hun- 
dred dollars,  and  forfeit  his  office,  and  the  same  shall  hereupon 


THE    NATIONAL    BANKRUPTCY    ACT  287 

become  vacant,  upon  conviction  of  the  offense  of,  having  know- 
ingly (1)  acted  as  a  referee  in  a  case  in  which  he  is  directly  or 
indirectly  interested;  or  (2)  purchased,  while  a  referee,  directly  or 
indirectly,  any  property  of  the  estate  in  bankruptcy  of  which  he  is 
referee;  or  (3)  refused,  while  a  referee  or  trustee,  to  permit  a 
reasonable  opportunity  for  the  inspection  of  the  accounts  relating 
to  the  affairs  of,  and  the  papers  and  records  of,  estates  in  his  charge 
by  parties  in  interest  when  directed  by  the  court  so  to  do. 

d.  A  person  shall  not  be  prosecuted  for  any  offense  arising 
under  this  act  unless  the  indictment  is  found  or  the  information  is 
filed  in  court  within  one  year  after  the  commission  of  the  offense. 

§  30.  Rules,  Forms,  and  Ofders. — a.  All  necessary  rules,  forms, 
and  orders  as  to  procedure  and  for  carrying  this  act  into  force  and 
effect  shall  be  prescribed,  and  may  be  amended  from  time  to  time, 
by  the  Supreme  Court  of  the  United  States. 

§31.  Computation  of  Time. — a.  Whenever  time  is  enumerated 
by  days  in  this  act,  or  in  any  proceeding  in  bankruptcy,  the  number 
of  days  shall  be  computed  by  excluding  the  first  and  including  the 
last,  unless  the  last  fall  on  a  Sunday  or  holiday,  in  which  event  the 
day  last  included  shall  be  the  next  day  thereafter  which  is  not  a 
Sunday  or  a  legal  holiday. 

§  32.  Transfer  of  Cases. — a.  In  the  event  petitions  are  filed 
against  the  same  person,  or  against  different  members  of  a  part- 
nership, in  different  courts  of  bankruptcy  each  of  which  has  juris- 
diction, the  cases  shall  be  transferred,  by  order  of  the  courts  re- 
linquishing jurisdiction,  to  and  be  consolidated  by  the  one  of  such 
courts  which  can  proceed  with  the  same  for  the  greatest  con- 
venience of  parties  in  interest. 


CHAPTER   V. 

OFFICERS,  THEIR  DUTIES   AND   COMPENSATION. 

§  33.    Creation  of  Two  Officers. — a.   The  offices  of  referee  and 
trustee  are  hereby  created. 

§34.     Appointment,    Removal,    and    Districts    of   Referees. — a. 

Courts  of  bankruptcy  shall,  within  the  territorial  limits  of  which  they 
respectively  have  jurisdiction,  (1)  appoint  referees  each  for  a  term 
of  two  years,  and  may,  in  their  discretion,  remove  them  because 
their  services  are  not  needed  or  for  other  cause;  and  (2)  designate. 


288  APPENDIX 

and  from  time  to  time  change,  the  limits  of  the  districts  of  referees, 
so  that  each  county,  where  the  services  of  a  referee  are  needed,  may- 
constitute  at  least  one  district. 

§35.  Qualifications  of  Referees. — a.  Individuals  shall  not  be 
eligible  to  appointment  as  referees  unless  they  are  respectively  (1) 
competent  to  perform  the  duties  of  that  office;  (2)  not  holding  any 
office  of  profit  or  emolument  under  the  laws  of  the  United  States 
or  of  any  State  other  than  commissioners  of  deeds,  justices  of  the 
peace,  masters  in  chancery,  or  notaries  public;  (3)  not  related  by 
consanguinity  or  affinity,  within  the  third  degree  as  determined  by 
the  common  law,  to  any  of  the  judges  of  the  courts  of  bankruptcy 
or  circuit  courts  of  the  United  States,  or  of  the  justices  or  judges  of 
the  appellate  courts  of  the  districts  wherein  they  may  be  appointed; 
and  (4)  residents  of,  or  have  their  offices  in,  the  territorial  districts 
for  which  they  are  to  be  appointed. 

§  36.  Oaths  of  Office  of  Referees. — a.  Referees  shall  take  the 
same  oath  of  office  as  that  prescribed  for  judges  of  United  States 
courts. 

§  37.  Number  of  Referees. — a.  Such  number  of  referees  shall 
be  appointed  as  may  be  necessary  to  assist  in  expeditiously  transact- 
ing the  bankruptcy  business  pending  in  the  various  courts  of  bank- 
ruptcy. 

§  38.  Jurisdiction  of  Referees. — a.  Referees  respectively  are 
hereby  invested,  subject  always  to  a  review  by  the  judge,  within 
the  limits  of  their  districts  as  established  from  time  to  time,  with 
jurisdiction  to  (1)  consider  all  petitions  referred  to  them  by  the 
clerks  and  make  the  adjudications  or  dismiss  the  petitions;  (2) 
exercise  the  powers  vested  in  courts  of  bankruptcy  for  the  ad- 
niinistering  of  oaths  to  and  the  examination  of  persons  as  witnesses 
and  for  requiring  the  production  of  documents  in  proceedings  be- 
fore them,  except  the  power  of  commitment;  (3)  exercise  the 
powers  of  the  judge  for  the  taking  possession  and  releasing  of  the 
property  of  the  bankrupt  in  the  event  of  the  issuance  by  the  clerk 
of  a  certificate  showing  the  absence  of  a  judge  from  the  judicial 
district,  or  the  division  of  the  district,  or  his  sickness,  or  inability 
to  act;  (4)  perform  such  part  of  the  duties  except  as  to  questions 
arising  out  of  the  applications  of  bankrupts  for  compositions  or 
discharges,  as  are  by  this  act  conferred  on  courts  of  bankruptcy 
and  as  shall  be  prescribed  by  rules  or  orders  of  the  courts  of  bank- 
ruptcy of  their  respective  districts,  except  as  herein  otherwise  pro- 


THE    NATIONAL    BANKRUPTCY    ACT  289 

vided;  and  (5)  upon  the  application  of  the  trustee  during  the  ex- 
amination of  the  bankrupts,  or  other  proceedings,  authorize  the 
employment  of  stenographers  at  the  expense  of  the  estates  at  a 
compensation  not  to  exceed  ten  cents  per  folio  for  reporting  and 
transcribing  the  proceedings. 

§  39.  Duties  of  Referees. — a.  Referees  shall  (1)  declare  divi- 
dends and  prepare  and  deliver  to  trustees  dividend  sheets  showing 
the  dividends  declared  and  to  whom  payable;  (2)  examine  all 
schedules  of  property  and  list  of  creditors  filed  by  bankrupts  and 
cause  such  as  are  incomplete  or  defective  to  be  amended;  (3)  furnish 
such  information  concerning  the  estates  in  process  of  administra- 
tion before  them  as  may  be  requested  by  the  parties  in  interest; 
(4)  give  notices  to  creditors  as  herein  provided;  (5)  make  up 
records  embodying  the  evidence,  or  the  substance  thereof,  as  agreed 
upon  by  the  parties  in  all  contested  matters  arising  before  them, 
whenever  requested  to  do  so  by  either  of  the  parties  thereto,  to- 
gether with  their  findings  therein,  and  transmit  them  to  the 
judges;  (6)  prepare  and  file  the  schedules  of  property  and  lists  of 
creditors  required  to  be  filed  by  the  bankrupts,  or  cause  the  same 
to  be  done,  when  the  bankrupts  fail,  refuse,  or  neglect  to  do  so;'  (7) 
safely  keep,  perfect,  and  transmit  to  the  clerks  the  records,  herein 
required  to  be  kept  by  them,  when  the  cases  are  concluded;  (8) 
transmit  to  the  clerks  such  papers  as  may  be  on  file  before  them 
whenever  the  same  are  needed  in  any  proceedings  in  courts,  and  in 
like  manner  secure  the  return  of  such  papers  after  they  have  been 
used,  or,  if  it  be  impracticable  to  transmit  the  original  papers, 
transmit  certified  copies  thereof  by  mail;  (9)  upon  application  of 
any  party  in  interest  preserve  the  evidence  taken  or  the  substance 
thereof  as  agreed  upon  by  the  parties  before  them  when  a  sten- 
ographer is  not  in  attendance;  and  (10)  whenever  their  respective 
offices  are  in  the  same  cities  or  towns  where  the  courts  of  bank- 
ruptcy convene,  call  upon  and  receive  from  the  clerks  all  papers 
filed  in  courts  of  bankruptcy  which  have  been  referred  to  them. 

b.  Referees  shall  not  (1)  act  in  cases  in  which  they  are  directly 
or  indirectly  interested;  (2)  practice  as  attorneys  and  counselors- 
at-law  in  any  bankruptcy  proceedings;  or  (3)  purchase,  directly  or 
indirectly,  any  property  of  an  estate  in  bankruptcy. 

§  40.  Compensation  of  Referees. — a.  Referees  shall  receive  as 
full  compensation  for  their  services,  payable  after  they  are  ren- 
dered, a  fee  of  fifteen  dollars  deposited  with  the  clerk  at  the  time 
the  petition  is  filed  in  each  case,  except  when  a  fee  is  not  required 
from  a  voluntary  bankrupt,  and  twenty-five  cents  for  every  proof 


290  APPENDIX 

of  claim  filed  for  allowance,  to  be  paid  from  the  estate,  if  any,  as  a 
part  of  the  cost  of  administration,  and  from  estates  which  have 
been  administered  before  them  one  per  centum  commissions  on  all 
moneys  disbursed  to  creditors  by  the  trustee,  or  one-half  of  one 
per  centum  on  the  amount  to  be  paid  to  creditors  upon  the  con- 
firmation of  a  composition. 

b.  Whenever  a  case  is  transferred  from  one  referee  to  another, 
the  judge  shall  determine  the  proportion  in  which  the  fee  and  com- 
missions therefor  shall  be  divided  between  the  referees. 

c.  In  the  event  of  the  reference  of  the  case  being  revoked 
before  it  is  concluded,  and  when  the  case  is  especially  referred,  the 
judge  shall  determine  what  part  of  the  fee  and  commissions  shall 
be  paid  to  the  referee. 

§41.  Contempts  before  Referees. — a.  A  person  shall  not,  in 
proceedings  before  a  referee,  (1)  disobey  or  resist  any  lawful 
order,  process  or  writ;  (2)  misbehave  during  a  hearing  or  so  near 
the  place  thereof  as  to  obstruct  the  same;  (3)  neglect  to  produce, 
after  having  been  ordered  to  do  so,  any  pertinent  document;  or  (4) 
refuse  to  appear  after  having  been  subpoenaed,  or,  upon  appearing, 
refuse  to  take  the  oaths  as  a  witness,  or,  after  having  taken  the 
oath,  refuse  to  be  examined  according  to  law:  Provided,  That  no 
person  shall  be  required  to  attend  as  a  witness  before  a  referee  at 
a  place  outside  of  the  State  of  his  residence,  and  more  than  one 
hundred  miles  from  such  place  of  residence,  and  only  in  case  his 
lawful  mileage  and  fee  for  one  day's  attendance  shall  be  first  paid 
or  tendered  to  him. 

b.  The  referee  shall  certify  the  facts  to  the  judge,  if  any 
person  shall  do  any  of  the  things  forbidden  in  this  section.  The 
judge  shall  thereupon,  in  a  summary  manner,  hear  the  evidence  as 
to  the  acts  complained  of,  and,  if  it  is  such  as  to  warrant  him  in  so 
doing,  punish  such  person  in  the  same  manner  and  to  the  same 
extent  as  for  a  contempt  committed  before  the  court  of  bank- 
ruptcy, or  commit  such  person  upon  the  same  conditions  as  if  the 
doing  of  the  forbidden  act  had  occurred  with  reference  to  the  pro- 
cess of,  or  in  the  presence  of,  the  court. 

§42.  Records  of  Referees. — a.  The  records  of  all  proceedings 
in  each  case  before  a  referee  shall  be  kept  as  nearly  as  may  be  in 
the  same  manner  as  records  are  now  kept  in  equity  cases  in  circuit 
courts  of  the  United  States. 

b.  A  record  of  the  proceedings  in  each  case  shall  be  kept  in  a 
separate  book  or  books,  and  shall,  together  with  the  papers  on  file, 
constitute  the  records  of  the  case. 


THE    NATIONAL    BANKRUPTCY    ACT  29 1 

c.  The  book  or  books  containing  a  record  of  the  proceedings 
shall,  when  the  case  is  concluded  before  the  referee,  be  certified  to 
by  him,  and,  together  with  such  papers  as  are  on  file  before  him, 
be  transmitted  to  the  court  of  bankruptcy  and  shall  there  remain 
as  a  part  of  the  records  of  the  court. 

§  43.  Referee's  Absence  or  Disability. — a.  Whenever  the  office 
of  a  referee  is  vacant,  or  its  occupant  is  absent  or  disqualified  to 
act,  the  judge  may  act,  or  may  appoint  another  referee,  or  another 
referee  holding  an  appointment  under  the  same  court  may,  by 
order  of  the  judge,  temporarily  fill  the  vacancy. 

§  44.  Appointment  of  Trustees. — a.  The  creditors  of  a  bank- 
rupt estate  shall,  at  their  first  meeting  after  the  adjudication  or 
after  a  vacancy  has  occurred  in  the  office  of  trustee,  or  after  an 
estate  has  been  reopened,  or  after  a  composition  has  been  set 
aside  or  a  discharge  revoked,  or  if  there  is  a  vacancy  in  the  office  of 
trustee,  appoint  one  trustee  or  three  trustees  of  such  estate.  If 
the  creditors  do  not  appoint  a  trustee  or  trustees  as  herein  provided, 
the  court  shall  do  so. 

§45.  Qualifications  of  Trustees. — a.  Trustees  may  be  (1)  in- 
dividuals who  are  respectively  competent  to  perform  the  duties  of 
that  office,  and  reside  or  have  an  office  in  the  judicial  district  within 
which  they  are  appointed,  or  (2)  corporations  authorized  by  their 
charters  or  by  law  to  act  in  such  capacity  and  having  an  office  in 
the  judicial  district  within  which  they  are  appointed. 

§46.  Death  or  Removal  of  Trustees. — a.  The  death  or  re- 
moval of  a  trustee  shall  not  abate  any  suit  or  proceeding  which  he 
is  prosecuting  or  defending  at  the  time  of  his  death  or  removal, 
but  the  same  may  be  proceeded  with  or  defended  by  his  joint 
trustee  or  successor  in  the  same  manner,  as  though  the  same  had 
been  commenced  or  was  being  defended  by  such  joint  trustee  alone 
or  by  such  successor. 

§47.  Duties  of  Trustees. — a.  Trustees  shall  respectively  (1) 
account  for  and  pay  over  to  the  estates  under  their  control  all  inter- 
est received  by  them  upon  property  of  such  estates;  (2)  collect  and 
reduce  to  money  the  property  of  the  estates  for  which  they  are 
trustees,  under  the  direction  of  the  court,  and  close  up  the  estate 
as  expeditiously  as  is  compatible  with  the  best  interests  of  the 
parties  in  interest;  and  such  trustees,  as  to  all  property  in  the 
custody  or  coming  into  the  custody  of  the  bankruptcy  court,  shall 


292 


APPENDIX 


be  deemed  vested  with  all  the  rights,  remedies,  and  powers  of  a 
creditor  holding  a  lien  by  legal  or  equitable  proceedings  thereon; 
and  also,  as  to  all  property  not  in  the  custody  of  the  bankruptcy 
court,  shall  be  deemed  vested  with  all  the  rights,  remedies,  and 
powers  of  a  judgment  creditor  holding  an  execution  duly  returned 
unsatisfied;  (3)  deposit  all  money  received  by  them  in  one  of  the 
designated  depositories;  (4)  disburse  money  only  by  check  or 
draft  on  the  depositories  in  which  it  has  been  deposited;  (5)  furnish 
such  information  concerning  the  estates  of  which  they  are  trustees 
and  their  administration  as  may  be  requested  by  parties  in  interest; 

(6)  keep  regular  accounts  showing  all  amounts  received  and  from 
what  sources   and   all   amounts   expended   and    on   what   accounts; 

(7)  lay  before  the  final  meeting  of  the  creditors  detailed  statements 
of  the  administration  of  the  estate;  (8)  make  final  reports  and  file 
final  accounts  with  the  courts  fifteen  days  before  the  days  fixed 
for  the  final  meetings  of  the  creditors;  (9)  pay  dividends  within  ten 
days  after  they  are  declared  by  the  referees;  (10)  report  to  the 
courts,  in  writing,  the  condition  of  the  estates  and  the  amounts  of 
money  on  hand,  and  such  other  details  as  may  be  required  by  the 
courts,  within  the  first  month  after  their  appointment  and  every 
two  months  thereafter,  unless  otherwise  ordered  by  the  courts; 
and  (11)  set  apart  the  bankrupt's  exemptions  and  report  the  items 
and  estimated  value  thereof  to  the  court  as  soon  as  practicable 
after  their  appointment. 

b.  Whenever  three  trustees  have  been  appointed  for  an  estate, 
the  concurrence  of  at  least  two  of  them  shall  be  necessary  to  the 
validity  of  their  every  act  concerning  the  administration  of  the 
estate. 

c.  The  trustee  shall,  within  thirty  days  after  the  adjudication, 
file  a  certified  copy  of  the  decree  of  adjudication  in  the  office  where 
conveyances  of  real  estate  are  recorded  in  every  county  where  the 
bankrupt  owns  real  estate  not  exempt  from  execution,  and  pay  the 
fee  for  such  filing,  and  he  shall  receive  a  compensation  of  fifty  cents 
for  each  copy  so  filed,  which,  together  with  the  filing  fee,  shall  be 
paid  out  of  the  estate  of  the  bankrupt  as  a  part  of  the  cost  and 
disbursements  of  the  proceedings. 

§  48.  Compensation  of  Trustees,  Receivers  and  Marshals. — a. 
Trustees  shall  receive  for  their  services  payable  after  they  are 
rendered,  a  fee  of  five  dollars  deposited  with  the  clerk  at  the  time 
the  petition  is  filed  in  each  case,  except  when  a  fee  is  not  required 
from  a  voluntary  bankrupt,  and  such  commissions  on  all  moneys 
disbursed  or  turned  over  .to  any  person,  including  Hen  holders,  by 
them,   as   may  be  allowed   by   the   courts,   not  to   exceed    six   per 


THE    NATIONAL    BANKRUPTCY    ACT  293 

centum  on  the  first  five  hundred  dollars  or  less,  four  per  centum  on 
moneys  in  excess  of  five  hundred  dollars  and  less  than  fifteen  hun- 
dred dollars,  two  per  centum  on  moneys  in  excess  of  fifteen  hun- 
dred dollars  and  less  than  ten  thousand  dollars,  and  one  per  centum 
on  moneys  in  excess  of  ten  thousand  dollars.  And  in  case  of  the 
confirmation  of  a  composition  after  the  trustee  has  qualified  the 
court  may  allow  him,  as  compensation,  not  to  exceed  one-half  of 
one  per  centum  of  the  amount  to  be  paid  the  creditors  on  such 
composition. 

b.  In  the  event  of  an  estate  being  administered  by  three 
trustees  instead  of  one  trustee  or  by  successive  trustees,  the  court 
shall  apportion  the  fees  and  commissions  between  them  according 
to  the  services  actually  rendered,  so  that  there  shall  not  be  paid  to 
trustees  for  the  administering  of  any  estate  a  greater  amount  than 
one  trustee  would  be  entitled  to. 

c.  The  court  may,  in  its  discretion,  withhold  all  compensation 
from  any  trustee  who  has  been  removed  for  cause. 

d.  Receivers  or  marshals  appointed  pursuant  to  section  two, 
subdivision  three,  of  this  act  shall  receive  for  their  services,  payable 
after  they  are  rendered,  compensation  by  way  of  commissions  upon 
the  moneys  disbursed  or  turned  over  to  any  person,  including  lien 
holders,  by  them,  and  also  upon  the  moneys  turned  over  by  them 
or  afterwards  realized  by  the  trustees  from  property  turned  over 
in  kind  by  them  to  the  trustees,  as  the  court  may  allow,  not  to 
exceed  six  per  centum  on  the  first  five  hundred  dollars  or  less,  four 
per  centum  on  moneys  in  excess  of  five  hundred  dollars  and  less 
than  one  thousand  five  hundred  dollars,  two  per  centum  on  moneys 
in  excess  of  one  thousand  five  hundred  dollars  and  less  than  ten 
thousand  dollars,  and  one  per  centum  on  moneys  in  excess  of  ten 
thousand  dollars:  Provided,  That  in  case  of  the  confirmation  of  a 
composition  such  commissions  shall  not  exceed  one-half  of  one  per 
centum  of  the  amount  to  be  paid  creditors  on  such  compositions: 
Provided  further,  That  when  the  receiver  or  marshal  acts  as  a  mere 
custodian  and  does  not  carry  on  the  business  of  the  bankrupt  as 
provided  in  clause  five  of  section  two  of  this  act,  he  shall  not 
receive  nor  be  allowed  in  any  form  or  guise  more  than  two  per 
centum  on  the  first  thousand  dollars  or  less,  and  one-half  of  one 
per  centum  on  all  above  one  thousand  dollars  on  moneys  disbursed 
by  him  or  turned  over  by  him  to  the  trustee  and  on  moneys  subse- 
quently realized  from  property  turned  over  by  him  in  kind  to  the 
trustee:  Provided  further,  That  before  the  allowance  of  compensa- 
tion notice  of  application  therefor,  specifying  the  amount  asked, 
shall  be  given  to  creditors  in  the  manner  indicated  in  section  fifty- 
eight  of  this  act. 


294 


APPENDIX 


e.  Where  the  business  is  conducted  by  trustees,  marshals,  or 
receivers,  as  provided  in  clause  five  of  section  two  of  this  act,  the 
court  may  allov^  such  officers  additional  compensation  for  such 
services  by  way  of  commissions  upon  the  moneys  disbursed  or 
turned  over  to  any  person,  including  lien  holders,  by  them,  and,  in 
cases  of  receivers  or  marshals,  also  upon  the  moneys  turned  over 
by  them  or  afterwards  realized  by  the  trustees  from  property  turned 
over  in  kind  by  them  to  the  trustees;  such  commissions  not  to 
exceed  six  per  centum  on  the  first  five  hundred  dollars  or  less,  four 
per  centum  on  moneys  in  excess  of  five  hundred  dollars  and  less 
than  one  thousand  five  hundred  dollars,  two  per  centum  on  moneys 
in  excess  of  one  thousand  five  hundred  dollars  and  less  than  ten 
thousand  dollars,  and  one  per  centum  on  moneys  in  excess  of  ten 
thousand  dollars:  Provided,  That  in  case  of  the  confirmation  of  a 
composition  such  commissions  shall  not  exceed  one-half  of  one  per 
centum  of  the  amount  to  be  paid  creditors  on  such  composition: 
Provided  further,  That  before  the  allowance  of  compensation  notice 
of  application  therefor,  specifying  the  amount  asked,  shall  be  given 
to  creditors  in  the  manner  indicated  in  section  fifty-eight  of  this 
act. 

§  49.  Accounts  and  Papers  of  Trustees. — a.  The  accounts  and 
papers  of  trustees  shall  be  open  to  the  inspection  of  officers  and  all 
parties  in  interest. 

§  50.  Bonds  of  Referees  and  Trustees. — a.  Referees,  before 
assuming  the  duties  of  their  offices,  and  within  such  time  as  the 
district  courts  of  the  United  States  having  jurisdiction  shall  pre- 
scribe, shall  respectively  q.ualify  by  entering  into  bond  to  the 
United  States  in  such  sum  as  shall  be  fixed  by  such  courts,  not  to 
exceed  five  thousand  dollars,  with  such  sureties,  as  shall  be  ap- 
proved by  such  courts,  conditioned  for  the  faithful  performance  of 
their  official  duties. 

b.  Trustees,  before  entering  upon  the  performance  of  their 
official  duties,  and  within  ten  days  after  their  appointment,  or 
within  such  further  time,  not  to  exceed  five  days,  as  the  court  may 
permit,  shall  respectively  qualify  by  entering  into  bond  to  the 
United  States,  with  such  sureties  as  shall  be  approved  by  the  courts, 
conditioned  for  the  faithful  performance  of  their  official  duties. 

c.  The  creditors  of  a  bankrupt  estate,  at  their  first  meeting 
after  the  adjudication,  or  after  a  vacancy  has  occurred  in  the 
office  of  trustee,  or  after  an  estate  has  been  reopened,  or  after  a 
composition  has  been  set  aside  or  a  discharge  revoked,  if  there 
is  a  vacancy  in  the  office  of  trustee,  shall  fix  the  amount  of  the 


THE    NATIONAL    BANKRUPTCY    ACT  295 

bond  of  the  trustee;  they  may  at  any  time  increase  the  amount  of 
the  bond.  If  the  creditors  do  not  fix  the  amount  of  the  bond  of  the 
trustee  as  herein  provided  the  court  shall  do  so. 

d.  The  court  shall  require  evidence  as  to  the  actual  value  of 
the  property  of  sureties. 

e.  There  shall  be  at  least  two  sureties  upon  each  bond. 

f.  The  actual  value  of  the  property  of  the  sureties,  over  and 
above  their  liabilities  and  exemptions,  on  each  bond  shall  equal  at 
least  the  amount  of  such  bond. 

g.  Corporations  organized  for  the  purpose  of  becoming  sureties 
upon  bonds,  or  authorized  by  law  to  do  so,  may  be  accepted  as 
sureties  upon  the  bonds  of  referees  and  trustees  whenever  the 
courts  are  satisfied  that  the  rights  of  all  parties  in  interest  will 
be  thereby  amply  protected. 

h.  Bonds  of  referees,  trustees,  and  designated  depositories 
shall  be  filed  of  record  in  the  office  of  the  clerk  of  the  court,  and 
may  be  sued  upon  in  the  name  of  the  United  States  for  the  use  of 
any  person  injured  by  a  breach  of  their  conditions. 

i.  Trustees  shall  not  be  liable,  personally  or  on  their  bonds, 
to  the  United  States,  for  any  penalties  or  forfeitures  incurred  by  the 
bankrupts  under  this  act,  of  whose  estates  they  are  respectively 
trustees. 

y.     Joint  trustees  may  give  joint  or  several  bonds. 

k.  If  any  referee  or  trustee  shall  fail  to  give  bond,  as  herein 
provided  and  within  the  time  limited,  he  shall  be  deemed  to  have 
declined  his  appointment,  and  such  failure  shall  create  a  vacancy 
in  his  office. 

/.  Suits  upon  referees'  bonds  shall  not  be  brought  subsequent 
to  two  years  after  the  alleged  breach  of  the  bond. 

m.  Suits  upon  trustees'  bonds  shall  not  be  brought  subsequent 
to  two  years  after  the  estate  has  been  closed. 

§  51.  Duties  of  Clerks. — a.  Clerks  shall  respectively  (1)  ac- 
count for,  as  for  other  fees  received  by  them,  the  clerk's  fee  paid 
in  each  case  and  such  other  fees  as  may  be  received  for  certified 
copies  of  records  which  may  be  prepared  for  persons  other  than 
officers;  (2)  collect  the  fees  of  the  clerk,  referee,  and  trustee  in 
each  case  instituted  before  filing  the  petition,  except  the  petition  of 
a  proposed  voluntary  bankrupt  which  is  accompanied  by  an  affidavit 
stating  that  the  petitioner  is  without,  and  cannot  obtain,  the  money 
with  which  to  pay  such  fees;  (3)  deliver  to  the  referees  upon  ap- 
plication all  papers  which  may  be  referred  to  them,  or,  if  the 
offices  of  such  i-eferees  are  not  in  the  same  cities  or  towns  as  the 
offices  of  such  clerks,  transmit  such  papers  by  mail,  and  in  like 


296  APPENDIX 

manner  return  papers  which  were  received  from  such  referees  after 
they  have  been  used;  (4)  and  within  ten  days  after  each  case  has 
been  closed  pay  to  the  referee,  if  the  case  was  referred,  the  fee 
collected  for  him,  and  to  the  trustee  the  fee  collected  for  him 
at  the  time  of  filing  the  petition. 

§  52.  Compensation  of  Clerks  and  Marshals. — a.  Clerks  shall 
respectively  receive  as  full  compensation  for  their  services  to  each 
estate,  a  filing  fee  of  ten  dollars,  except  when  a  fee  is  not  required 
from  a  voluntary  bankrupt. 

b.  Marshals  shall  respectively  receive  from  the  estate  where 
an  adjudication  in  bankruptcy  is  made,  except  as  herein  otherwise 
provided,  for  the  performance  of  their  service  in  proceedings  in 
bankruptcy,  the  same  fees,  and  account  for  them  in  the  same  way, 
as  they  are  entitled  to  receive  for  the  performance  of  the  same  or 
similar  services  in  other  cases  in  accordance  with  laws  now  in 
force,  or  such  as  may  be  hereafter  enacted,  fixing  the  compensation 
of  marshals. 

§  53.  Duties  of  Attorney-General. — a.  The  Attorney-General 
shall  annually  lay  before  Congress  statistical  tables  showing  for  the 
whole  country,  and  by  States,  the  number  of  cases  during  the  year 
of  voluntary  and  involuntary  bankruptcy;  the  amount  of  the  prop- 
erty of  the  estates;  the  dividends  paid  and  the  expenses  of  ad- 
ministering such  estates;  and  such  other  like  information  as  he  may 
deem  important. 

§54.  Statistics  of  Bankruptcy  Proceedings. — a.  Officers  shall 
furnish  in  writing  and  transmit  by  mail  such  information  as  is 
within  their  knowledge,  and  as  may  be  shown  by  the  records  and 
papers  in  their  possession,  to  the  Attorney-General,  for  statistical 
purposes,  within  ten  days  after  being  requested  by  him  to  do  so. 


CHAPTER   VI. 


CREDITORS. 


§  55.  Meetings  of  Creditors. — a.  The  court  shall  cause  the 
first  meeting  of  the  creditors  of  a  bankrupt  to  be  held,  not  less 
than  ten  nor  more  than  thirty  days  after  the  adjudication,  at  the 
county  seat  of  the  county  in  which  the  bankrupt  has  had  his  prin- 
cipal place  of  business,  resided,  or  had  his  domicile;  or  if  that 
place  would  be  manifestly  inconvenient  as  a  place  of  meeting  for 
the  parties  in  interest,  or  if  the  bankrupt  is  one  who  does  not  do 


THE    NATIONAL    BANKRUPTCY    ACT  297 

business,  reside,  or  have  his  domicile  within  the  United  States,  the 
court  shall  fix  a  place  for  the  meeting  which  is  the  most  convenient 
for  parties  in  interest.  If  such  meeting  should  by  any  mischance 
not  be  held  within  such  time,  the  court  shall  fix  the  date,  as  soon 
as  may  be  thereafter,  when  it  shall  be  held. 

b.  At  the  first  meeting  of  creditors  the  judge  or  referee  shall 
preside,  and,  before  proceeding  with  the  other  business,  may  allow 
or  disallow  the  claims  of  creditors  there  presented,  and  may  pub- 
licly examine  the  bankrupt  or  cause  him  to  be  examined  at  the 
instance  of  any  creditor. 

c.  The  creditors  shall  at  each  meeting  take  such  steps  as  may 
be  pertinent  and  necessary  for  the  promotion  of  the  best  interests 
of  the  estate  and  the  enforcement  of  this  act. 

d.  A  meeting  of  creditors,  subsequent  to  the  first  one,  may 
be  held  at  any  time  and  place  when  all  of  the  creditors  who  have 
secured  the  allowance  of  their  claims  sign  a  written  consent  to  hold 
a  meeting  at  such  time  and  place. 

e.  The  court  shall  call  a  meeting  of  creditors  whenever  one- 
fourth  or  more  in  number  of  those  who  have  proven  their  claims 
shall  file  a  written  request  to  that  effect;  if  such  request  is  signed 
by  a  majority  of  such  creditors,  which  number  represents  a  majority 
in  amount  of  such  claims,  and  contains  a  request  for  such  meeting 
to  be  held  at  a  designated  place,  the  court  shall  call  such  meeting 
at  such  place  within  thirty  days  after  the  date  of  the  filing  of  the 
request. 

f.  Whenever  the  affairs  of  the  estate  are  ready  to  be  closed 
a  final  meeting  of  creditors  shall  be  ordered. 

§  56.  Voters  at  Meetings  of  Creditors. — a.  Creditors  shall  pass 
upon  matters  submitted  to  them  at  their  meetings  by  a  majority 
vote  in  number  and  amount  of  claims  of  all  creditors  whose  claims 
have  been  allowed  and  are  present,  except  as  herein  otherwise 
provided. 

b.  Creditors  holding  claims  which  are  secured  or  have  priority 
shall  not,  in  respect  to  such  claims,  be  entitled  to  vote  at  creditors' 
meetings,  nor  shall  such  claims  be  counted  in  computing  either  the 
number  of  creditors  or  the  amount  of  their  claims,  unless  the 
amounts  of  such  claims  exceed  the  values  of  such  securities  or 
priorities,  and  then  only  for  such  excess. 

§  57.  Proof  and  Allowance  of  Claims. — a.  Proof  of  claims  shall 
consist  of  a  statement  under  oath,  in  writing,  signed  by  a  creditor 
setting  forth  the  claim,  the  consideration  therefor,  and  whether 
any,  and,  if  so  what,  securities  are  held  therefor,  and  whether  any, 


298  APPENDIX 

and,  if  so  what,  payments  have  been  made   thereon,  and  that  the 
sum  claimed  is  justly  owing  from  the   bankrupt  to  the  creditor. 

b.  Whenever  a  claim  is  founded  upon  an  instrument  of  writ- 
ing, such  instrument,  unless  lost  or  destroyed,  shall  be  filed  with 
the  proof  of  claim.  If  such  instrument  is  lost  or  destroyed,  a  state- 
ment of  such  fact  and  of  the  circumstances  of  such  loss  or  destruc- 
tion shall  be  filed  under  oath  with  the  claim.  After  the  claim  is 
allowed  or  disallowed,  such  instrument  may  be  withdrawn  by 
permission  of  the  court,  upon  leaving  a  copy  thereof  on  file  with 
the  claim. 

c.  Claims  after  being  proved  may,  for  the  purpose  of  allow- 
ance, be  filed  by  the  claimants  in  the  court  where  the  proceedings 
are  pending,  or  before  the  referee  if  the  case  has  been  referred. 

d.  Claims  which  have  been  duly  proved  shall  be  allowed,  upon 
receipt  by  or  upon  presentation  to  the  court,  unless  objection  to 
their  allowance  shall  be  made  by  parties  in  interest,  or  their 
consideration  be  continued  for  cause  by  the  court  upon  its  own 
motion. 

e.  Claims  of  secured  creditors  and  those  who  have  priority 
may  be  allowed  to  enable  such  creditors  to  participate  in  the  pro- 
ceedings at  creditors'  meetings  held  prior  to  the  determination  of 
the  value  of  their  securities  or  priorities,  but  shall  be  allowed  for 
such  sums  only  as  to  the  courts  seem  to  be  owing  over  and  above 
the  value  of  their  securities  or  priorities. 

f.  Objections  to  claims  shall  be  heard  and  determined  as  soon 
as  the  convenience  of  the  court  and  the  best  interests  of  the 
estates  and  the  claimants  will  permit. 

g.  The  claims  of  creditors  who  have  received  preferences, 
voidable  under  section  sixty,  subdivision  b,  or  to  whom  convey- 
ances, transfers,  assignments,  or  encumbrances,  void  or  voidable 
under  section  sixty-seven,  subdivision  e,  have  been  made  or  given, 
shall  not  be  allowed  unless  such  creditors  shall  surrender  such 
preferences,  conveyances,  transfers,  assignments,  or  encumbrances. 

h.  The  value  of  securities  held  by  secured  creditors  shall  be 
determined  by  converting  the  same  into  money  according  to  the 
terms  of  the  agreement  pursuant  to  which  such  securities  were  de- 
livered to  such  creditors  or  by  such  creditors  and  the  trustee,  by 
agreement,  arbitration,  compromise,  or  litigation,  as  the  court  may 
direct,  and  the  amount  of  such  value  shall  be  credited  upon  such 
claims,  and  a  dividend  shall  be  paid  only  on  the  unpaid  balance. 

t.  Whenever  a  creditor,  whose  claim  against  a  bankrupt  estate 
is  secured  by  the  individual  undertaking  of  any  person,  fails  to 
prove  such  claim,  such  person  may  do  so  in  the  creditor's  name. 


THE    NATIONAL    BANKRUPTCY    ACT  299 

and  if  he  discharge  such  undertaking  in  whole  or  in  part  he  shall 
be  subrogated  to  that  extent  to  the  rights  of  the  creditor. 

;'.  Debts  owing  to  the  United  States,  a  State,  a  county,  a 
district,  or  a  municipality  as  a  penalty  or  forfeiture  shall  not  be 
allowed,  except  for  the  amount  of  the  pecuniary  loss  sustained  by 
the  act,  transaction,  or  proceeding  out  of  which  the  penalty  or  for- 
feiture arose,  with  reasonable  and  actual  costs  occasioned  thereby 
and  such  interest  as  may  have  accrued  thereon  according  to  law. 

k.  Claims  which  have  been  allowed  may  be  reconsidered  for 
cause  and  reallowed  or  rejected  in  whole  or  in  part,  according  to 
the  equities  of  the  case,  before  but  not  after  the  estate  has  been 
closed. 

/.  Whenever  a  claim  shall  have  been  reconsidered  and  rejected, 
in  whole  or  in  part,  upon  which  a  dividend  has  been  paid,  the 
trustee  may  recover  from  the  creditor  the  amount  of  the  dividend 
received  upon  the  claim  if  rejected  in  whole  or  the  proportional 
part  thereof  if  rejected  only  in  part. 

m.  The  claim  of  any  estate  which  is  being  administered  in 
bankruptcy  against  any  like  estate  may  be  proved  by  the  trustee 
and  allowed  by  the  court  in  the  same  manner  and  upon  like  terms 
as  the  claims  of  other  creditors. 

n.  Claims  shall  not  be  proved  against  a  bankrupt  estate  sub- 
sequent to  one  year  after  the  adjudication;  or  if  they  are  liquidated 
by  litigation  and  the  final  judgment  therein  is  rendered  within 
thirty  days  before  or  after  the  expiration  of  such  time,  then  within 
sixty  days  after  the  rendition  of  such  judgment:  Provided,  That  the 
right  of  infants  and  insane  persons  without  guardians,  without 
notice  of  the  proceedings,  may  continue  six  months  longer. 

§  58.  Notice  to  Creditors. — a.  Creditors  shall  have  at  least  ten 
days'  notice  by  mail,  to  their  respective  addresses  as  they  appear 
in  the  list  of  creditors  of  the  bankrupt,  or  as  afterwards  filed  with 
the  papers  in  the  case  by  the  creditors,  unless  they  waive  notice 
in  writing,  of  (1)  all  examinations  of  the  bankrupt;  (2)  all  hearings 
upon  applications  for  the  confirmation  of  compositions;  (3)  all 
meetings  of  creditors;  (4)  all  proposed  sales  of  property;  (5)  the 
declaration  and  time  of  payment  of  dividends;  (6)  the  filing  of  the 
final  accounts  of  the  trustee,  and  the  time  when  and  the  place 
where  they  will  be  examined  and  passed  upon;  (7)  the  proposed 
compromise  of  any  controversy;  (8)  the  proposed  dismissal  of  the 
proceedings;  and  (9)  there  shall  be  thirty  days*  notice  of  all  applica- 
tions for  the  discharge  of  bankrupts. 

b.  Notice  to  creditors  of  the  first  meeting  shall  be  published 
at  least  once  and  may  be  published  such  number  of  additional  times 


300 


APPENDIX 


as  the  court  may  direct;  the  last  publication  shall  be  at  least  one 
week  prior  to  the  date  fixed  for  the  meeting.  Other  notices  may 
be  published  as  the  court  shall  direct. 

c.  All  notices  shall  be  given  by  the  referee,  unless  otherwise 
ordered  by  the  judge. 

§  59.  Who  May  File  and  Dismiss  Petitions. — a.  Any  qualified 
person  may  file  a  petition  to  be  adjudged  a  voluntary  bankrupt. 

h.  Three  or  more  creditors  who  have  provable  claims  against 
any  person  which  amount  in  the  aggregate  in  excess  of  the  value 
of  securities  held  by  them,  if  any,  to  five  hundred  dollars  or  over; 
or  if  all  of  the  creditors  of  such  person  are  less  than  twelve  in  num- 
ber, then  one  of  such  creditors  whose  claim  equals  such  amount 
may  file  a  petition  to  have  him  adjudged  a  bankrupt. 

c.  Petitions  shall  be  filed  in  duplicate,  one  copy  for  the  clerk 
and  one  for  service  on  the  bankrupt. 

d.  If  it  be  averred  in  the  petition  that  the  creditors  of  the 
bankrupt  are  less  than  twelve  in  number,  and  less  than  three 
creditors  have  joined  as  petitioners  therein,  and  the  answer  avers 
the  existence  of  a  larger  number  of  creditors,  there  shall  be  filed 
with  the  answer  a  list  under  oath  of  all  the  creditors,  with  their 
addresses,  and  thereupon  the  court  shall  cause  all  such  creditors  to 
be  notified  of  the  pendency  of  such  petition  and  shall  delay  the 
hearing  upon  such  petition  for  a  reasonable  time,  to  the  end  that 
parties  in  interest  shall  have  an  opportunity  to  be  heard;  if  upon 
such  hearing  it  shall  appear  that  a  sufficient  number  have  joined  in 
such  petition,  or  if  prior  to  or  during  such  hearing  a  sufficient  num- 
ber shall  join  therein,  the  case  may  be  proceeded  with,  but  other- 
wise it  shall  be  dismissed. 

e.  In  computing  the  number  of  creditors  of  a  bankrupt  for 
the  purpose  of  determining  how  many  creditors  must  join  in  the 
petition,  such  creditors  as  were  employed  by  him  at  the  time  of 
the  filing  of  the  petition  or  are  related  to  him  by  consanguinity  or 
affinity  within  the  third  degree,  as  determined  by  the  common  law, 
and  have  not  joined  in  the  petition,  shall  not  be  counted. 

f.  Creditors  other  than  original  petitioners  may  at  any  time 
enter  their  appearance  and  join  in  the  petition,  or  file  an  answer 
and  be  heard  in  opposition  to  the  prayer  of  the  petition. 

g.  A  voluntary  or  involuntary  petition  shall  not  be  dismissed 
by  the  petitioner  or  petitioners  or  for  want  of  prosecution  or  by 
consent  of  parties  until  after  notice  to  the  creditors,  and  to  that 
end  the  court  shall)  before  entertaining  an  application  for  dismissal, 
require  the  bankrupt  to  file  a  list,  under  oath,  of  all  his  creditors, 
with  their  addresses,  and  shall  cause  notice  to  be  sent  to  all  such 


THE    NATIONAL    BANKRUPTCY    ACT 


301 


creditors  of  the  pendency  of  such  application,  and  shall  delay  the 
hearing  thereon  for  a  reasonable  time  to  allow  all  creditors  and 
parties  in  interest  opportunity  to  be  heard. 

§60.  Preferred  Creditors. — a.  A  person  shall  be  deemed  to 
have  given  a  preference  if,  being  insolvent,  he  has,  within  four 
months  before  the  filing  of  the  petition,  or  after  the  filing  of  the 
petition  and  before  the  adjudication,  procured  or  suffered  a  judg- 
ment to  be  entered  against  himself  in  favor  of  any  person,  or  made 
a  transfer  of  any  of  his  property,  and  the  effect  of  the  enforcement 
of  such  judgment  or  transfer  will  be  to  enable  any  one  of  his 
creditors  to  obtain  a  greater  percentage  of  his  debt  than  any  other 
of  such  creditors  of  the  same  class.  Where  the  preference  con- 
sists in  a  transfer,  such  period  of  four  months  shall  not  expire  until 
four  months  after  the  date  of  the  recording  or  registering  of  the 
transfer,  if  by  law  such  recording  or  registering  is  required. 

b.  If  a  bankrupt  shall  have  procured  or  suffered  a  judgment 
to  be  entered  against  him  in  favor  of  any  person  or  have  made  a 
transfer  of  any  of  his  property,  and  if,  at  the  time  of  the  transfer, 
or  of  the  entry  of  the  judgment,  or  of  the  recording  or  registering 
of  the  transfer  if  by  law  recording  or  registering  thereof  is  required, 
and  being  within  four  months  before  the  filing  of  the  petition  in 
bankruptcy  or  after  the  filing  thereof,  and  before  the  adjudication, 
the  bankrupt  be  insolvent  and  the  judgment  or  transfer  then 
operate  as  a  preference,  and  the  person  receiving  it  or  to  be  bene- 
fited thereby,  or  his  agent  acting  therein,  shall  then  have  reason- 
able cause  to  believe  that  the  enforcement  of  such  judgment  or 
transfer  would  effect  a  preference,  it  shall  be  voidable  by  the  trus- 
tee and  he  may  recover  the  property  or  its  value  from  such  person. 
And  for  the  purpose  of  such  recovery  any  court  of  bankruptcy,  as 
hereinbefore  defined,  and  any  State  court  which  would  have  had 
jurisdiction  if  bankruptcy  had  not  intervened,  shall  have  concurrent 
jurisdiction. 

c.  If  a  creditor  has  been  preferred,  and  afterwards  in  good 
faith  gives  the  debtor  further  credit  without  security  of  any  kind 
for  property  which  becomes  a  part  of  the  debtor's  estates,  the 
amount  of  such  new  credit  remaining  unpaid  at  the  time  of  the 
adjudication  in  bankruptcy  may  be  set  off  against  the  amount 
which  would  otherwise  be  recoverable  from  him. 

d.  If  a  debtor  shall,  directly  or  indirectly,  in  contemplation  of 
the  filing  of  a  petition  by  or  against  him,  pay  money  or  transfer 
property  to  an  attorney  and  counsellor-at-law,  solicitor  in  equity, 
or  proctor  in  admiralty  for  services  to  be  rendered,  the  transaction 
shall  be  re-examined  by  the  court  on  petition  of  the  trustee  or  any 


302  APPENDIX 

creditor  and  shall  only  be  held  valid  to  the  extent  of  a  reasonable 
amount  to  be  determined  by  the  court,  and  the  excess  may  be  re- 
covered by  the  trustee  for  the  benefit  of  the  estate. 


CHAPTER    VII. 


ESTATES. 


§  61.  Depositories  for  Money. — a.  Courts  of  bankruptcy  shall 
designate,  by  order,  banking  institutions  as  depositories  for  the 
money  of  bankrupt  estates,  as  convenient  as  may  be  to  the  resi- 
dences of  trustees,  and  shall  require  bonds  to  the  United  States, 
subject  to  their  approval,  to  be  given  by  such  banking  institutions, 
and  may  from  time  to  time  as  occasion  may  require,  by  like  order 
increase  the  number  of  depositories  or  the  amount  of  any  bond  or 
change  such  depositories. 

§  62.  Expenses  of  Administering  Estates. — a.  The  actual  and 
necessary  expenses  incurred  by  officers  in  the  administration  of 
estates  shall,  except  where  other  provisions  are  made  for  their 
payment,  be  reported  in  detail,  under  oath,  and  examined  and 
approved  or  disapproved  by  the  court.  If  approved,  they  shall  be 
paid  or  allowed  out  of  the  estates  in  which  they  were  incurred. 

^63.  Debts  Which  May  Be  Proved.— a.  Debts  of  the  bank- 
rupt may  be  proved  and  allowed  against  his  estate  which  are  (1) 
a  fixed  liability,  as  evidenced  by  a  judgment  or  an  instrument  in 
writing,  absolutely  owing  at  the  time  of  the  filing  of  the  petition 
against  him,  whether  then  payable  or  not,  with  any  interest  thereon 
which  would  have  been  recoverable  at  that  date  or  with  a  rebate 
of  interest  upon  such  as  were  not  then  payable  and  did  not  bear 
interest;  (2)  due  as  costs  taxable  against  an  involuntary  bankrupt 
who  was  at  the  time  of  the  filing  of  the  petition  against  the  plain- 
tiff in  a  cause  of  action  which  would  pass  to  the  trustee  and  which 
the  trustee  declines  to  prosecute  after  notice;  (3)  founded  upon  a 
claim  for  taxable  costs  incurred  in  good  faith  by  a  creditor  before 
the  filing  of  the  petition  in  an  action  to  recover  a  provable  debt; 
(4)  founded  upon  an  open  account,  or  upon  a  contract  express  or 
implied;  and  (5)  founded  upon  provable  debts  reduced  to  judgments 
after  the  filing  of  the  petition  and  before  the  consideration  of  the 
bankrupt's  application  for  a  discharge,  less  costs  incurred  and 
interest  accrued  after  the  filing  of  the  petition  and  up  to  the  time 
of  the  entry  of  such  judgments. 

b.     Unliquidated  claims  against  the  bankrupt  may,  pursuant  to 


THE    NATIONAL    BANKRUPTCY    ACT 


303 


application  to  the  court,  be  liquidated  in  such  manner  as  it  shall 
direct,  and  may  thereafter  be  proved  and  allowed  against  his 
estate. 

§64.  Debts  Which  Have  Priority. — a.  The  court  shall  order 
the  trustee  to  pay  all  taxes  legally  due  and  owing  by  the  bankrupt 
to  the  United  States,  State,  county,  district,  or  municipality  in 
advance  of  the  payment  of  dividends  to  creditors,  and  upon  filing 
the  receipts  of  the  proper  public  officers  for  such  payment  he  shall 
be  credited  with  the  amount  thereof,  and  in  case  any  question 
arises  as  to  the  amount  or  legality  of  any  such  tax  the  same  shall 
be  heard  and  determined  by  the  court. 

b.  The  debts  to  have  priority,  except  as  herein  provided  and 
to  be  paid  in  full  out  of  bankrupt  estates,  and  the  order  of  pay- 
ment shall  be  (1)  the  actual  and  the  necessary  cost  of  preserving 
the  estate  subsequent  to  filing  the  petition;  (2)  the  filing  fees  paid 
by  creditors  in  involuntary  cases,  and  where  property  of  the 
bankrupt,  transferred  or  concealed  by  him  either  before  or  after 
the  filing  of  the  petition,  shall  have  been  recovered  for  the  benefit 
of  the  estate  of  the  bankrupt  by  the  efforts  and  at  the  expense  of 
one  or  more  creditors,  the  reasonable  expenses  of  such  recovery; 
(3)  the  cost  of  administration,  including  the  fees  and  mileage  pay- 
able to  witnesses  as  now  or  hereafter  provided  by  the  laws  of  the 
United  States,  and  one  reasonable  attorney's  fee,  for  the  profes- 
sional services  actually  rendered,  irrespective  of  the  number  of 
attorneys  employed,  to  the  petitioning  creditors  in  involuntary 
cases,  to  the  bankrupt  in  involuntary  cases  while  performing  the 
duties  herein  prescribed,  and  to  the  bankrupt  in  voluntary  cases 
as  the  court  may  allow;  (4)  wages  due  to  workmen,  clerks,  travel- 
ing or  city  salesmen,  or  servants  which  have  been  earned  within 
three  months  before  the  date  of  the  commencement  of  proceedings, 
not  to  exceed  three  hundred  dollars  to  each  claimant;  and  (5)  debts 
owing  to  any  person  who  by  the  laws  of  the  States  or  the  United 
States  is  entitled  to  priority. 

c.  In  the  event  of  the  confirmation  of  a  composition  being 
set  aside,  or  a  discharge  revoked,  the  property  acquired  by  the 
bankrupt  in  addition  to  his  estate  at  the  time  the  composition  was 
confirmed  or  the  adjudication  was  made  shall  be  applied  to  the 
payment  in  full  of  the  claims  of  creditors  for  property  sold  to 
him  on  credit,  in  good  faith,  while  such  composition  or  discharge 
was  in  force,  and  the  residue,  if  any,  shall  be  applied  to  the  pay- 
ment of  the  debts  which  were  owing  at  the  time  of  the  adjudication. 

§  65.     Declaration  and   Payment   of   Dividends. — a.     Dividends 


304 


APPENDIX 


of  an  equal  per  centum  shall  be  declared  and  paid  on  all  allowed 
claims,  except  such  as  have  priority  or  are  secured. 

b.  The  first  dividend  shall  be  declared  within  thirty  days  after 
the  adjudication,  if  the  money  of  the  estate  in  excess  of  the  amount 
necessary  to  pay  the  debts  which  have  priority  and  such  claims  as 
have  not  been,  but  probably  will  be,  allowed  equals  five  per  centum 
or  more  of  such  allowed  claims.  Dividends  subsequent  to  the  first 
shall  be  declared  upon  like  terms  as  the  first  and  as  often  as  the 
amount  shall  equal  ten  per  centum  or  more  and  upon  closing  the 
estate.  Dividends  may  be  declared  oftener  and  in  smaller  pro- 
portions if  the  judge  shall  so  order;  Provided,  That  the  first  divi- 
dend shall  not  include  more  than  fifty  per  centum  of  the  money 
of  the  estate  ,in  excess  of  the  amount  necessary  to  pay  the  debts 
which  have  priority  and  such  claims  as  probably  will  be  allowed: 
And  provided  further.  That  the  final  dividend  shall  not  be  declared 
within  three  months  after  the  first  dividend  shall  be  declared. 

c.  The  rights  of  creditors  who  have  received  dividends,  or  in 
whose  favor  final  dividends  have  been  declared,  shall  not  be  affected 
by  the  proof  and  allowance  of  claims  subsequent  to  the  date  of 
such  payment  or  declaration  of  dividends;  but  the  creditors  proving 
and  securing  the  allowance  of  such  claims  shall  be  paid  dividends 
equal  in  amount  to  those  already  received  by  the  other  creditors 
if  the  estate  equals  so  much  before  such  other  creditors  are  paid 
any  further  dividends. 

d.  Whenever  a  person  shall  have  been  adjudged  a  bankrupt 
by  a  court  without  the  United  States  and  also  by  a  court  of  bank- 
ruptcy, creditors  residing  within  the  United  States  shall  first  be 
paid  a  dividend  equal  to  that  received  in  the  court  without  the 
United  States  by  other  creditors  before  creditors  who  have  re- 
ceived a  dividend  in  such  court  shall  be  paid  any  amounts, 

e.  A  claimant  shall  not  be  entitled  to  collect  from  a  bankrupt 
estate  any  greater  amount  than  shall  accrue  pursuant  to  the  pro- 
visions of  this  act. 

§  66.  Unclaimed  Dividends. — a.  Dividends  which  remain  un- 
claimed for  six  months  after  the  final  dividend  has  been  declared 
shall  be  paid  by  the  trustee  into  court. 

b.  Dividends  remaining  unclaimed  for  one  year  shall  under 
the  direction  of  the  court  be  distributed  to  the  creditors  whose 
claims  have  been  allowed  but  not  paid  in  full,  and  after  such  claims 
have  been  paid  in  full  the  balance  shall  be  paid  to  the  bankrupt; 
Provided,  That  in  case  unclaimed  dividends  belong  to  minors  such 
minors  may  have  one  year  after  arriving  at  majority  to  claim  such 
dividends. 


THE    NATIONAL    BANKRUPTCY    ACT  305 

§  67.  Liens. — a.  Claims  which  for  want  of  record  or  for 
other  reasons  would  not  have  been  valid  liens  as  against  the  claims 
of  the  creditors  of  the  bankrupt  shall  not  be  liens  against  his 
estate. 

b.  Whenever  a  creditor  is  prevented  from  enforcing  his  rights 
as  against  a  lien  created,  or  attempted  to  be  created,  by  his  debtor, 
who  afterwards  becomes  a  bankrupt,  the  trustee  of  the  estate  of 
such  bankrupt  shall  be  subrogated  to  and  may  enforce  such 
rights  of  such  creditor  for  the  benefit  of  the  estate. 

c.  A  lien  created  by  or  obtained  in  or  pursuant  to  any  suit 
or  proceeding  at  law  or  in  equity,  including  an  attachment  upon 
mesne  process  or  a  judgment  by  confession,  which  was  begun 
against  a  person  within  four  months  before  the  filing  of  a  petition 
in  bankruptcy  by  or  against  such  person  shall  be  dissolved  by  the 
adjudication  of  such  person  to  be  a  bankrupt  if  (1)  it  appears  that 
said  lien  was  obtained  and  permitted  while  the  defendant  was 
insolvent  and  that  its  existence  and  enforcement  will  work  a  prefer- 
ence, or  (2)  the  party  or  parties  to  be  benefited  thereby  had  rea- 
sonable cause  to  believe  the  defendant  was  insolvent  and  in  con- 
templation of  bankruptcy,  or  (3)  that  such  lien  was  sought  and 
permitted  in  fraud  of  the  provisions  of  this  act;  or  if  the  dissolution 
of  such  lien  would  militate  against  the  best  interests  of  the  estate 
of  such  person  the  same  shall  not  be  dissolved,  but  the  trustee  of 
the  estate  of  such  person,  for  the  benefit  of  the  estate,  shall  be 
subrogated  to  the  rights  of  the  holder  of  such  lien  and  empowered 
to  perfect  and  enforce  the  same  in  his  name  as  trustee  with  like 
force  and  effect  as  such  holder  might  have  done  had  not  bankruptcy 
proceedings  intervened. 

d.  Liens  given  or  accepted  in  good  faith  and  not  in  contem- 
plation of  or  in  fraud  upon  this  act,  and  for  a  present  consideration, 
which  have  been  recorded  according  to  law,  if  record  thereof  was 
necessary  in  order  to  impart  notice,  shall,  to  the  extent  of  such 
present  consideration  only,  not  be  affected  by  this  act. 

e.  That  all  conveyances,  transfers,  assignments,  or  incum- 
brances of  his  property,  or  any  part  thereof,  made  or  given  by  a 
person  adjudged  a  bankrupt  under  the  provisions  of  this  act  sub- 
sequent to  the  passage  of  this  act  and  within  four  months  prior 
to  the  filing  of  the  petition,  with  the  intent  and  purpose  on  his 
part  to  hinder,  delay,  or  defraud  his  creditors,  or  any  of  them, 
shall  be  null  and  void  as  against  the  creditors  of  such  debtor, 
except  as  to  purchasers  in  good  faith  and  for  a  present  fair  con- 
sideration; and  all  property  of  the  debtor  conveyed,  transferred, 
assigned,  or  encumbered  as  aforesaid  shall,  if  he  be  adjudged  a 
bankrupt,  and  the  same  is  not  exempt  from  execution  and  liability 


3o6  APPENDIX 

for  debts  by  the  law  of  his  domicile,  be  and  remain  a  part  of  the 
assets  and  estate  of  the  bankrupt  and  shall  pass  to  his  said  trustee, 
whose  duty  it  shall  be  to  recover  and  reclaim  the  same  by  legal 
proceedings  or  otherwise  for  the  benefit  of  the  creditors.  And  all 
conveyances,  transfers,  or  encumbrances  of  his  property  made  by 
a  debtor  at  any  time  within  four  months  prior  to  the  filing  of  the 
petition  against  him,  and  while  insolvent,  which  are  held  null  and 
void  as  against  the  creditors  of  such  debtor  by  the  laws  of  the 
State,  Territory,  or  District  in  which  such  property  is  situate,  shall 
be  deemed  null  and  void  under  this  act  against  the  creditors  of  such 
debtor  if  he  be  adjudged  a  bankrupt,  and  such  property  shall  pass 
to  the  assignee  and  be  by  him  reclaimed  and  recovered  for  the 
benefit  of  the  creditors  of  the  bankrupt.  For  the  purpose  of  such 
recovery  any  court  of  bankruptcy  as  hereinbefore  defined,  and  any 
State  court  which  would  have  had  jurisdiction  if  bankruptcy  had 
not  intervened,  shall  have  concurrent  jurisdiction. 

f.  That  all  levies,  judgments,  attachments,  or  other  liens,  ob- 
tained through  legal  proceedings  against  a  person  who  is  insolvent, 
at  any  time  within  four  months  prior  to  the  filing  of  a  petition  in 
bankruptcy  against  him,  shall  be  deemed  null  and  void  in  case  he 
is  adjudged  a  bankrupt,  and  the  property  affected  by  the  levy,  judg- 
ment, attachment,  or  other  lien  shall  be  deemed  wholly  discharged 
and  released  from  the  same,  and  shall  pass  to  the  trustee  as  a 
part  of  the  estate  of  the  bankrupt,  unless  the  court  shall,  on  due 
notice,  order  that  the  right  under  such  levy,  judgment,  attachment, 
or  other  lien  shall  be  preserved  for  the  benefit  of  the  estate;  and 
thereupon  the  same  may  pass  to  and  shall  be  preserved  by  the 
trustee  for  the  benefit  of  the  estate  as  aforesaid.  And  the  court 
may  order  such  conveyance  as  shall  be  necessary  to  carry  the 
purposes  of  this  section  into  effect:  Provided,  That  nothing  herein 
contained  shall  have  the  effect  to  destroy  or  impair  the  title  ob- 
tained by  such  levy,  judgment,  attachment,  or  other  lien  of  a 
bona  fide  purchaser  for  value  who  shall  have  acquired  the  same 
without  notice  or  reasonable  cause  for  inquiry. 

§68.  Set-offs  and  Counterclaims.— a.  In  all  cases  of  mutual 
debts  or  mutual  credits  between  the  estate  of  a  bankrupt  and  a 
creditor  the  account  shall  be  stated  and  one  debt  shall  be  set  off 
against  the  other,  and  the  balance  only  shall  be  allowed  or  paid. 

b.  A  set-off  or  counterclaim  shall  not  be  allowed  in  favor  of 
any  debtor  of  the  bankrupt  which  (1)  is  not  provable  against  the 
estate;  or  (2)  was  purchased  by  or  transferred  to  him  after  the 
filing  of  the  petition,  or  within  four  months  before  such  filing,  with 


THE    NATIONAL    BANKRUPTCY    ACT 


307 


a  view  to  such  use  and  with  knowledge  or  notice  that  such  bankrupt 
was  insolvent,  or  had  committed  an  act  of  bankruptcy. 

§  69.  Possession  of  Property. — a.  A  judge  may,  upon  satis- 
factory proof,  by  affidavit,  that  a  bankrupt  against  whom  an  in- 
voluntary petition  has  been  filed  and  is  pending  has  committed 
an  act  of  bankruptcy,  or  has  neglected  or  is  neglecting,  or  is  about 
to  so  neglect  his  property  that  it  has  thereby  deteriorated  or  is 
thereby  deteriorating  or  is  about  thereby  to  deteriorate  in  value, 
issue  a  warrant  to  the  marshal  to  seize  and  hold  it  subject  to 
further  orders.  Before  such  warrant  is  issued  the  petitioners 
applying  therefor  shall  enter  into  a  bond  in  such  an  amount  as 
the  judge  shall  fix,  with  such  sureties  as  he  shall  approve,  con- 
ditioned to  indemnify  such  bankrupt  for  such  damages  as  he  shall 
sustain  in  the  event  such  seizure  shall  prove  to  have  been  wrong- 
fully obtained.  Such  propeity  shall  be  released,  if  such  bankrupt 
shall  give  bond  in  a  sum  which  shall  be  fixed  by  the  judge,  with 
such  sureties  as  he  shall  approve,  conditioned  to  turn  over  such 
property,  or  pay  the  value  thereof  in  money  to  the  trustee,  in 
the  event  he  is  adjudged  a  bankrupt  pursuant  to  such  petition. 

§70.  Title  to  Property.— a.  The  trustee  of  the  estate  of  a 
bankrupt,  upon  his  appointment  and  qualification,  and  his  suc- 
cessor or  successors,  if  he  shall  have  one  or  more,  upon  his  or  their 
appointment  and  qualification  shall  in  turn  be  vested  by  operation 
of  law  with  the  title  of  the  bankrupt,  as  of  the  date  he  was  adjudged 
a  bankrupt,  except  in  so  far  as  it  is  to  property  which  is  exempt,  to 
all  (1)  documents  relating  to  his  property;  (2)  interests  in  patents, 
patent  rights,  copyrights,  and  trade-marks;  (3)  powers  which  he 
might  have  exercised  for  his  own  benefit,  but  not  those  which  he 
might  have  exercised  for  some  other  person;  (4)  property  trans- 
ferred by  him  in  fraud  of  his  creditors;  (5)  property  which  prior 
to  the  filing  of  the  petition  he  could  by  any  means  have  transferred 
or  which  might  have  been  levied  upon  and  sold  under  judicial 
process  against  him:  Provided,  That  when  any  bankrupt  shall  have 
any  insurance  policy  which  has  a  cash  surrender  value  payable  to 
himself,  his  estate,  or  personal  representatives,  he  may,  within 
thirty  days  after  the  cash  surrender  value  has  been  ascertained 
and  stated  to  the  trustee  by  the  company  issuing  the  same,  pay  or 
secure  to  the  trustee  the  sum  so  ascertained  and  stated,  and  con- 
tinue to  hold,  own,  and  carry  such  policy  free  from  the  claims  of 
the  creditors  participating  in  the  distribution  of  his  estate  under  the 
bankruptcy  proceedings,  otherwise  the  policy  shall  pass  to  the 
trustee  as  assets;  and  (6)  rights  of  action  arising  upon  contracts 


3o8  APPENDIX 

or   from   the    unlawful    taking   or   detention   of,    or   injury   to,   his 
property. 

b.  All  real  and  personal  property  belonging  to  bankrupt 
estates  shall  be  appraised  by  three  disinterested  appraisers;  they 
shall  be  appointed  by,  and  report  to,  the  court.  Real  and  personal 
property  shall,  when  practicable,  be  sold  subject  to  the  approval 
of  the  court;  it  shall  not  be  sold  otherwise  than  subject  to  the 
approval  of  the  court  for  less  than  seventy-five  per  centum  of  its 
appraised  value. 

c.  The  title  to  property  of  a  bankrupt  estate  which  has  been 
sold,  as  herein  provided,  shall  be  conveyed  to  the  purchaser  by  the 
trustee. 

d.  Whenever  a  composition  shall  be  set  aside,  or  discharge 
revoked,  the  trustee  shall,  upon  his  appointment  and  qualification, 
be  vested  as  herein  provided  with  the  title  to  all  of  the  property 
of  the  bankrupt  as  of  the  date  of  the  final  decree  setting  aside  the 
composition  or  revoking  the  discharge. 

e.  The  trustee  may  avoid  any  transfer  by  the  bankrupt  of  his 
property  which  any  creditor  of  such  bankrupt  might  have  avoided, 
and  may  recover  the  property  so  transferred,  or  its  value,  from  the 
person  to  whom  it  was  transferred  unless  he  was  a  bona  fide 
holder  for  value  prior  to  the  date  of  the  adjudication.  Such  prop- 
erty may  be  recovered  or  its  value  collected  from  whoever  may 
have  received  it,  except  a  bona  fide  holder  for  value.  For  the 
purpose  of  such  recovery  any  court  of  bankruptcy  as  hereinbefore 
defined,  and  any  State  court  which  would  have  had  jurisdiction 
if  bankruptcy  had  not  intervened,  shall  have  concurrent  jurisdic- 
tion. 

f.  Upon  the  confirmation  of  a  composition  offered  by  a  bank- 
rupt, the  title  to  his  property  shall  thereupon  revest  in  him. 

§  71.  That  the  clerks  of  the  several  district  courts  of  the 
United  States  shall  prepare  and  keep  in  their  respective  offices 
complete  and  convenient  indexes  of  all  petitions  and  discharges 
in  bankruptcy  heretofore  or  hereafter  filed  in  the  said  courts,  and 
shall,  when  requested  so  to  do,  issue  certificates  of  search  certifying 
as  to  whether  or  not  any  such  petitions  or  discharges  have  been 
filed;  and  said  clerks  shall  be  entitled  to  receive  for  such  certificates 
the  same  fees  as  now  allowed  by  law  for  certificates  as  to  judg- 
ments in  said  courts:  Provided,  That  said  bankruptcy  indexes  and 
dockets  shall  at  all  times  be  open  to  inspection  and  examination 
by  all  persons  or  corporations  without  any  fee  or  charge  therefor. 

§  72.     That  neither  the  referee,  receiver,  marshal,   nor  trustee 


THE    NATIONAL    BANKRUPTCY    ACT  309 

shall  in  any  form  or  guise  receive,  nor  shall  the  court  allow  him, 
any  other  or  further  compensation  for  his  services  than  that  ex- 
pressly authorized  and  prescribed  in  this  act. 


THE    TIME    WHEN    THIS    ACT    SHALL    GO    INTO    EFFECT 

o.  This  act  shall  go  into  full  force  and  effect  upon  its  passage: 
Provided,  however.  That  no  petition  for  voluntary  bankruptcy  shall 
be  filed  within  one  month  of  the  passage  thereof,  and  no  petition 
for  involuntary  bankruptcy  shall  be  filed  within  four  months  of  the 
passage  thereof. 

b.  Proceedings  commenced  under  State  insolvency  laws  before 
the  passage  of  this  act  shall  not  be  affected  by  it. 

The  amendatory  act  of  1903  provides  as  follows: 
§  19.  That  the  provisions  of  this  amendatory  act  shall  not 
apply  to  bankruptcy  cases  pending  when  this  act  takes  effect,  but 
such  cases  shall  be  adjudicated  and  disposed  of  conformably  to 
the  provisions  of  the  said  act  of  July  first,  eighteen  hundred  and 
ninety-eight. 

The  amendatory  act  of  1910  provides  as  follows: 
§  14.  That  the  provisions  of  this  amendatory  act  shall  not 
apply  to  bankruptcy  cases  pending  when  this  act  takes  effect,  but 
such  cases  shall  be  adjudicated  and  disposed  of  conformably  to 
the  provisions  of  said  act  approved  July  first,  eighteen  hundred 
and  ninety-eight,  as  amended  by  said  act  approved  February  fifth, 
nineteen  hundred  and  three,  and  as  further  amended  by  said  act 
approved  June  fifteenth,  nineteen  hundred  and  six. 


INDEX 


Abuses  (trade),  effect  on  credit 
standingr,  145 

Advance  fee  collection  agencies, 
166 

Adjustments     and     adjustment 
bureaus,  167,  170-180 
adjuster,  170 

credit  man  as,  172 
qualifications  of,  170 
bankruptcy  method,  176 
definition  of  adjustment,  170 
elements  of  adjustment,  171 
National  Association  of  Credit 

Men  method,  174,  177-180 
"real"  adjustment,  details  and 
advantages  of,  173 

Affidavit  to  claim,  204-2G6 

Agency,  commercial  (see  "Com- 
mercial Agency") 

Agent,     credit    insurance     (see 
"Credit  Insurance") 

"Allowed"  claims,  197,  204-206 

Anti-Commercial  Statute  as  to 
notes,  161 

Assets    of   customer,   effect  on 
credits,  49 

Assigned  claims,  206 

Attorney,    power    of    in    bank- 
ruptcy, 210 
forms,  269 

Attorneys  (collection),  154,  168 

B 
Bad  risks  for  credit,  27 
Bank, 
as  source  of  credit  informa- 
tion, 41 


report  on  customer, 
forms,  242 
Bank  credits,  66-79 

basis  o^  66 

broker^s  relation  to,  75 

commercial  paper,  74-78 

comparison    with    mercantile 
credits,  66 

credit  men,  67,  73,  78 

effect  on  business  principles, 
73 

French  method  of  filing  infor- 
mation, 71 

function  of  department,  68 

information  essential  for  cred- 
it-granting, 69 

mutual  interest  of  bank  and 
its  customers,  78 

practical  uses  of  bank  records, 
72 

stock  and  bond  hmrcstments. 

Bankrupt,  211-220 
duties  o^  214 
examination  oii,  211 
false  statements  o^  215 
protection  of,  219 
rights  of,  213 

settlement     by     composition, 
215 
Bankruptcy  Act, 
statutes,  270 
Bankruptcy    as    a    method    of 
settlement      with      debtors, 
175 
Bankruptcy^-causes    of    foilure, 
181-186 
analysis,  181-186 


3" 


312 


INDEX 


Bankruptcy — continued 

disaster     and     competition, 

185 
fraud,  184 
incompetence,  182 
lack  of  capital,  183 
neglect,  speculation,  and  ex- 
travagance, 184 
Bankruptcy — claims,  204-210 
forms,  268 
assigned  claims,  206 
filing,  196,  209 
proof,  204-210 
affidavit,  204-208 
power  of  attorney,  210 

forms,  269 
who  makes,  207 
provable  debts,  208 
secured  claims,  206 
Bankruptcy  court,   196 
Bankruptcy,    discharge   in,   221- 
228 
acts  barring,  223 

concealment      of      financial 

condition,  224 
false  statement,  225 
fraudulent     conveyance     of 

property,  226 
refusal  to  obey  court,  227 
opposition  to,  221 
Bankruptcy    law    and    proceed- 
ings, 187-195 
statutes,  270 
credit  man  and  the  law,   189, 

227 
involuntary  bankruptcy,  190 
jurisprudence,  189 
National  Bankruptcy  Act,  187 

statutes,  270 
petition,    192 

forms,  266,  267 
filing,   192 
procedure  in  bankruptcy,   191 
referee,  194 


state  laws,  188 
Bankruptcy  —  proceedings,      o  f 
creditors,  196-203 
bankruptcy  court,  196 
filing  claims,  196 
meetings,   198 
trustee,  duties  of,  201 
trustee,  election  of,  200 
Blanks,     credit     (see     "Inquiry 

Blanks") 
Blanks,  property  statement  (see 

"Statements") 
Bradstreet   Co.    (see   "Commer- 
cial Agency") 
analysis   of  failures,   181 
Brief  (credit),  37 
Broker,  relation  to  bank  credit 

man,  75 
Bureaus    (adjustment)    and    ad- 
justments, 617,  170-180 
Bureaus,     trade     (see     "Ledger 
E  X  p  e  r  i  e  nee,  Interchange 
of") 


Cancellations,  145 

Capital  and  expenses  of  custom- 
er,  effect  on   credits,  48 

Capital,  lack  of  as  cause  of  fail- 
ure, 183 

Causes   of  failure,   181-186   (see 
also    "Bankruptcy") 

Checking  orders  for  credit  (see 
"Orders") 

Claims    in    bankruptcy,    204-210 
(see  also  "Bankruptcy") 
forms,  268 

Claims  by  customers,  143 

Classification  of  credit  informa- 
tion, 
forms,  263 

Clearing     house     (see     "Credit 
Clearing  House") 


INDEX 


313 


Collection  agencies,  152,  163-169 
adjustments,     167     (see     also 

"Adjustments") 
advance  fee,  166 
definition  of  terms,  163 
Dun's  and  the  Clearing  House, 

163 
"fake,"  151 
work  of,  164 
Collection    attorneys,    154,    155, 

168 
Collection   correspondence    (see 

"Correspondence") 
Collection  department,   147-180 
Collector  and  his  methods,  147- 

155 
attitude  toward  customer,  149, 

156 
attitude   toward   delinquent 

debtor,  150 
collection  agency,  152 
"collection    agency"    method, 

151 
draft  method,  152 
legal  proceedings,   152 
qualifications,   147,  156 
relation    to    collection    attor- 
ney, 154 
relation  to  credit  department, 

148 
Commercial    agency,    40,    46-48, 

80-87 
Bradstreet's   analysis    of   fail- 
ures, 181 
contracts  with,  87 
Dun's    collection    department, 

163 
organization,  83 

district  reporter,  84 
property  statements,  84-86 
rating  books,  82 
reports  by,  47,  82-86,   110-112 

forms,  110,  111 
use  of,  80 


Commercial     Law     League     of 

America,  169 
Commercial  paper  as  investment 
for  banks,  74-78 
indorsed,  11 
rating,  76 
Competition  as  cause  of  failure, 

185 
Competitors,    attitude   of   credit 

department  toward,  19 
Complaints  from  customers,  re- 
plying to,  162 
Compositions,  215-217 
Concealment  of  financial  condi- 

dition  by  bankrupt,  224 
Contracts      with      commercial 

agencies,  87 
Corporation   claim,   affidavit   to, 

208 
Corporation       property      state- 
ments, 245,  246 
forms,  250,  251,  254,  255 
Correspondence,   collection   and 
credit,  156-162 
answers  to  complaints,  162 
attitude    of    collector    toward 

the  customer,  156 
first  request  for  payment,  158 
form  collection  letters,  159 
notes  as  evidence,  161 
refusal  of  order,  161 
requests  for — 
credit  information,  159 
security,  160 
Court  of  bankruptcy,  196 
Credit  clearing  house,  99-106 
advantages,  103 
collection  department,  163 
compared    with    commercial 

agency,  106 
methods — the    district    office, 

100 
reports,  101,  102,  112-115 
forms,  114,  264,  265 


3H 


INDEX 


Credit     correspondence     (see 

"Correspondence") 
Credit  department,  13-21,  118-126 
attitude    toward    competitors, 

19 
expense  allowance,   16 
old  methods  and  new,  13 
policy,  17,  139-146 
relation  to   collection  depart- 
ment, 148 
relations    with    other    depart- 
ments, 15 
safety  appliances  in,  118-126 
reclamations,   124 
recoveries,  123 
replevin,  124 

statements,  118-123  (see  also 
"Statements") 
Credit-granting,  44-65   (see  also 

"Bank  Credits") 
Credit-Granting — the    customer, 
44-53    (see  also  "Credit  In- 
formation") 
assets,  49 

capital  and  expenses,  48 
confidence  and  credit,  44 
effect  of  trade  abuses,  145 
general    business     conditions, 

52 
insurance,  51 

investigation,  46-52,   107-117 
liabilities,  50 
local  conditions,  51 
Credit-Granting — the  house,  54- 
65 
bad  risks,  27 

classification  of  business  as  to 
credit,  45-65 
large  jobbing  house,  59 
local  jobbing  house,  54-59 
manufacturer,  60-65 
Credit  guaranty, 

forms,  261,  262 
Credit  information,  40-43,  80-126 


(see  also  "Credit-granting") 
checking  orders,  107-117 
classification  of, 

forms,  263 
sources, 
banks,  41 

commercial    agency,    46-48, 
80-87  (see  also  "Commer- 
cial Agency") 
customer's   references,  43 
interchange    of    ledger    ex- 
perience, 95-106  (see  also 
"Ledger    Experience,    In- 
terchange of") 
National      Association      of 
Credit    Men,    88-94    (see 
also     "National     Associa- 
tion of  Credit  Men") 
salesmen's  reports,  42 
forms,  231,  232 
Credit  inquiry  blanks   (see  "In- 
quiry Blanks") 
Credit  insurance,  126-138 
advantages      and      objections, 

134-137 
function,  126 
limitations,  131 
origin  and  methods,   127 
precautionary  measure,  127 
scope,  129 

work  of  insurance  agent,   129 
wrong  view,  133 
Credit  man,  14-16,  22-35 
as  adjuster,  172 
as  business  advisor,  29 
attitude  of,  25,  32 
attitude      toward      competing 

credit  men,  19 
bank  credit  man,  (il ,  72),  78 
caution  a  requisite,  33 
knowledge  of  the  bankruptcy 

law,  189,  227 
policy,  136 
problems,  139-146 


INDEX 


315 


Credit   man — continued 

qualifications,  24,  27,  30,  33,  34, 
139 

responsibilities    of    in    manu- 
facturing house,  62 

selection,  22 

tact  an  asset,  30 

watching  the  accounts,  34 

work  of,  14-16 
Credit  office  machinery,  36-43 

credit  brief,  37 

forms  and  blanks,  38 

methods  and  equipment,  38 

office  force,  36 
Credit  office  routine,  13-79 
Creditors'  claims  in  bankruptcy 
(see  "Bankruptcy — claims") 
Creditors,    proceedings    of,    196- 
203  (see  also  "Bankruptcy") 
Credit   protection    (see    "Credit 
Department,    Safety    Appli- 
ances  in,"   also   "Credit  In- 
surance") 
Customer     (see     also     "Credit- 
Granting") 

attitude    of   collector   toward, 
149,  156 

checking     orders     for     credit, 
107-117   (see  "Orders") 

credit  man  keeping  in  touch 
with  accounts,  34 

investigation    for    credit,    46- 
52,  107-117 

problems  of  credit  man  as  to, 
139-146 

references  as  source  of  infor- 
mation, 43 

reports  on  (see  "Reports") 

statements  (see  "Statements") 


Debtors  (see  "Collection  Agen- 
cies"   and   "Collector") 
Debts,  provable,  208 


Disaster    as    cause    of    business 
failure,  185 

Discharge    in    bankruptcy,    221- 
228  (see  also  "Bankruptcy") 

Discounts   (excessive),  141 

District  reporter  of  commercial 
agency,  84 

Draft  method  of  collecting  ac- 
count, 152 

Dun,   R.   G.   &  Co.   (see  "Com- 
mercial Agency") 
collection  department,   163 

Duties  of  credit  man,  14-16 


Employees  in  the  credit  depart- 
ment, 36 

Envelope  containing  customer's 
statement,  119 

Examination  of  bankrupt,  211 

Expense  of  credit  department, 
16 

F 

Failure,  causes  of,  181-186  (see 
also  "Bankruptcy") 

Filing  claims  by  creditors,  196, 
209 

Filing  devices  for  credit  office, 
38 

Filing  petitions  in  bankruptcy, 
193 

Financial  statements  (see 
"Statements  of  Customer") 

Fire  insurance,   137 

Form  collection  letters,  159 

Forms, 
bankruptcy,  266-269 
credit,  231-265 

Fraud  as  cause  of  business  fail- 
ure, 184 

Fraudulent  conveyance  of  prop- 
erty by  bankrupt,  226 


3i6 


INDEX 


Fraudulent  statement  by  bank- 
rupt, 215,  225 

Fraudulent  statement  by  cus- 
tomer, 121-123 

French  method  of  filing  credit 
information,  71 

Furniture  trade,  96 


Granting    credit     (see    "Credit- 
granting") 

Guaranty, 

forms,  261,  262 


Incompetence  as  cause  of  fail- 
ure, 182 
Information  (see  "Credit  Infor- 
mation") 
classification  of, 
forms,  263 
Inquiry  blanks,  38 
forms,  233-244 
classification  of  information  of, 

forms,  263 
for  attorney, 

forms,  243,  244 
for  bank, 

forms,  242 
general, 

forms,  241 
trade, 
forms,  233-240 
Insolvency,  181-228  (see  "Bank- 
ruptcy") 
Instalment  business,  64 
Insurance, 

credit,    126-138     (see    "Credit 

Insurance") 
effect  on  credits,  51 
fire,  137 
Interchange    of    ledger    experi- 
ence   (see   "Ledger") 


Interest,  failure  to  pay  by  cus- 
tomer, 140 

Investigation  for  credit  (see 
"Credit  Information,"  also 
"Credit-Granting") 

Investigation  of  credit  state- 
ment, 48,  120 

Investigation  of  orders,  107 

Investments    by    bank, 
commercial  paper,  74-78 
stock  and  bonds,  IZ 

Involuntary  bankruptcy,   190 


Jobbing   house   granting   credit, 
54-65 
large, 
advantages,  59 
rating,  59 
local 

constructive  credits,  58 
credit  conditions,  54-57 
credit  precautions,  57 

Jurisprudence,    bankruptcy,    189 


Law,    bankruptcy    (see    "Bank- 
ruptcy") 
Lawyers   (see  "Attorneys") 
Ledger   experience,   interchange 
of,  19,  95-106 
Credit  Clearing  House,  99-106 
trade  bureau,  95 
Legal  proceedings  in  collecting 

account,  153-155 
Letters  (see  "Correspondence") 
Liabilities    of   customer, 

effect  on  credits,  50 
Loveland,  213 

M 

Manufacturer, 

credit  conditions,  60,  dZ 


INDEX 


317 


Manufacturer — continued 

effect    of   mill    conditions    on 

credit,  62 
instalment  trade,  64 
responsibilities  of  credit  man, 
62 
Methods  of  credit  office,  13 
Mill  conditions,  effect  on  credit, 
62 


N 

National  Association   of   Credit 
Men,   15,  43,  88-94 
forms,  234,  235,  247-255,  261, 
262 
adjustment  bureaus,   174,   177- 

180 
benefits,  93 
committees,  91 
guaranty, 

forms,  261,  262 
origin  and  ideals,  88 
purpose,  88 
property  statements,  245,  246 

forms,  247-255 
trade  inquiry  blank, 

forms,  234,  235 
work,  90 
National  Bankruptcy  Act,  187 

statutes,   270 
Neglect     as     cause     of    failure, 

184 
New    customer,    salesman's    re- 
port on,  42 
forms,  232 
Notes  as  evidence,  161 


Office,      credit       (see      "Credit 

Office") 
Orders,  checking  for  credit,  46- 

52,  107-117 


classification  of  orders,  107 

collateral  data,  115 

commercial     agency     reports, 
82-86,  110-112 
forms,  110 

Credit     Clearing     House     re- 
ports, 101,  102,  112-115 
forms,   114,  264,  265 

handling  order,  116 

incoming  orders,   107 

investigation  of  orders,  107 

refusal  of  orders,  161 

reports,  110-116 


Partnership       property       state- 
ments, 245,  246 
forms,    247-249,    252-259 

Petition  in  bankruptcy,  192-194 
forms,  266,  267 

Policy  of  credit  department,  17- 
21 

Policy  of  credit  man,  25-35,  55- 
65,  78,  87 

Power    of    attorney,    in    bank- 
ruptcy, 210 
forms,   269 

Proceedings  of  creditors,  196- 
203  (see  also  "Bankruptcy") 

Proof  of  claim,  204-210 

Property  statements  (see  "State- 
ments") 

Prosecutions  for  false  custom- 
er's statement,  122,  123 

Protection,  credit  (see  "Credit 
Department,  Safety  Appli- 
ances in,"  also  "Credit  In- 
surance") 

Provable  debts,  208 

Publications  of  commercial 
agencies,  82 


3i8 


INDEX 


Qualifications, 
of  adjuster,  170 
of  collector,  147,  156 
of  credit  man,  24,  27,  30,  33, 
34.  139 


Rating    books     of     commercial 

agencies,  82 
Reclamations,  124 
Recoveries,  123 

Referee  in  bankruptcy,  194,  202 
References     of     customers     as 

source    of    credit    informa- 
tion, 43 
Refusal     of     customer's     order, 

108,  161 
Remington.  Harold,  189 
Replevin,  124 

Reporter  (district)   of  commer- 
cial agency,  84 
Reports  on  customer   (see  also 

"Statements") 
attorney's, 

forms,  243,  244 
bank's, 

forms,  242 
commercial  agency,  47,  82-86, 

110-112 

forms,  110,  111 
Credit    Clearing    House,    101- 

102,   112-115 

forms,  114,  264,  265 
general, 

forms,  241 
salesman's,  42 

forms,  231,  232 
trade, 

forms,  233-240 
Returned   merchandise,   144 
Rights  of  bankrupt,  213 
Routine  of  credit  office,  13-79 


S 

Safety  appliances   in   credit   de- 
partment   (see   "Credit   De- 
partment") 
Salesman's  report  on  customer, 
42 

forms,  231,  232 
Schulman,   214 
Secured  claims,  206 
Selection  of  credit  man,  22 
Settlement    with    debtors     (see 

"Adjustments") 
Shoe  trade,  95 
State  bankruptcy  laws,  188 
Statements  of  bankrupt, 
fraudulent,  215 

bar  to  discharge,  225 
Statements  of  customers,  47,  84- 
86,    118-123,    245,    246    (see 
also  "Reports") 
forms,  247-260 
commercial  agency,  47,  84-86 
"container,"  119 
corporation,  245,  246 

forms,  250,  251,  254,  255 
credit  office  form,  48 

forms,  256-260 
false  statements  laws,  121 

prosecutions,  122 
getting  statement,  119 
individual  or  partnership,  245, 
246 

forms,  247-249,  252-259 
investigation,  48,  120 
National  Association  of  Credit 
Men,  245,  246 
forms,  247-255 
"self-contained,"   118 
verbal,  118 
waiver  clause, 

forms,  258 
written,  50,  118 
Stocks  and  bond  investments  by 
bank.  73 


INDEX 


319 


Trade  abuses,  eflPcct  on  credit 

sfandinfi^  145 
Trade  bnreans,  95 
Trade  iaqmry  blanks, 

forms,  233-240 
Trustee, 
dnties  and  prcrogatrres,  201 
election  of,  20O 


Verbal  cnstomei's  statement,  113 


Waiver 


forms.  258 
IViitten    cnstomer's 
50.  118 


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